Glossary of Initial Public Offering (IPO) Terms

| 13 min. read | By Olivia Foster
Explore a comprehensive glossary of terms related to Initial Public Offerings (IPOs). Enhance your understanding of IPOs, underwriting, prospectus, market capitalization, and more.

Essential IPO Terms you need to know

  1. IPO
  • Initial Public Offering is the process where a privately held company offers its shares to the public for the first time. This typically occurs when a company seeks to raise capital to expand or scale their operations. The process transforms a private company into a public one.
  1. Underwriter
  • An underwriter is an investment bank or a group of banks that handle IPO processes, including regulatory requirements, determining the IPO price, and selling shares. They bear the risk of selling the shares and guarantee a certain amount of capital to the company.
  1. Prospectus
  • A prospectus is a legal document that companies are required to file with the securities regulator, such as the SEC in the United States. It details information about the company’s operations, financials, assets, business model, and plans for the proceeds from the IPO.
  1. Primary Market
  • The primary market refers to the market where new securities are issued and sold to investors by the issuer. IPOs take place in the primary market. The issuer receives the funds raised in this market.
  1. Secondary Market
  • The secondary market is where investors trade securities among themselves after the IPO. The company does not receive any funds from these transactions. The New York Stock Exchange and NASDAQ are examples of secondary markets.
  1. Pre-IPO Placement
  • A pre-IPO placement occurs when a portion of an IPO is placed with private investors right before the IPO is scheduled to hit the market. These private investors can be mutual funds, hedge funds, or other large financial institutions.
  1. Listing
  • Listing refers to the company’s shares being available for trading on a public stock exchange post-IPO. A company must meet specific requirements to be eligible for listing.
  1. Quiet Period
  • The quiet period is a mandatory period of time leading up to an IPO during which the company must limit its public statements about its operations to avoid hyping the stock. This period is designed to prevent manipulation of the market.
  1. Roadshow
  • A roadshow involves company executives and underwriters traveling to meet potential investors. They present their business model and plans for growth, aiming to generate interest and secure early investments.
  1. Green Shoe Option
  • The green shoe option allows underwriters to sell more shares than initially planned if the demand for a security issue proves higher than expected. This option helps stabilize share prices in the open market.
  1. Lock-up Period
  • A lock-up period is a predetermined amount of time following an IPO during which large shareholders, like company executives and investors, are restricted from selling their shares. The purpose is to stabilize the stock price after the IPO.
  1. Flipping
  • Flipping in an IPO context refers to the act of buying shares in an IPO and then selling them quickly once the company has gone public. The aim is to earn a quick profit from the often immediate rise in the price of newly listed stocks.
  1. Dilution
  • Dilution occurs when a company issues new shares in an IPO, which results in a decrease in existing shareholders’ ownership percentage of that company. It can also lead to a decrease in earnings per share, which could potentially reduce the stock’s price.
  1. Price Range
  • The price range in an IPO is the estimated range of an initial share price offered to the public. This range is set by underwriters and can be adjusted based on investor demand during the book-building process.
  1. Oversubscribed
  • An IPO is said to be oversubscribed when the demand for shares exceeds the number of shares issued. It is a sign that the price of shares might increase once trading begins due to high demand.
  1. Book Building
  • Book building is the process by which an underwriter attempts to determine the price to offer for an IPO, based on demand from institutional investors. It helps in discovering the price and demand for the upcoming IPO.
  1. Allocation
  • Allocation refers to the number of shares an investor receives during an IPO. In the case of oversubscription, the number of shares actually allocated might be less than the number applied for.
  1. IPO Price
  • The IPO price is the price at which shares of a company are first offered to the public during an IPO. The IPO price is decided by the company in consultation with the underwriters.
  1. Direct Listing
  • A direct listing is a method by which a company can go public without an underwriter. In this process, only existing shares are sold, and there is no lock-up period. This method is often cheaper than a traditional IPO.
  1. SPAC
  • Special Purpose Acquisition Companies (SPACs) are companies with no commercial operations that are established solely to raise capital through an IPO for the purpose of acquiring an existing company. SPACs are also known as blank check companies.
  1. Red Herring
  • A red herring is a preliminary prospectus filed by the company with the Securities and Exchange Commission (SEC) as part of the IPO process. This document contains most of the details of the business and the upcoming IPO, but it does not include the price or the number of shares to be offered.
  1. Stabilization
  • Stabilization is an action taken by underwriters to prevent a decline in the price of a new security after the IPO. This is often achieved by buying shares in the open market, thereby providing a level of support for the price.
  1. Syndicate
  • A syndicate in an IPO is a group of investment banks and brokerage firms that are invited to participate in the new issue. The syndicate helps sell the security, and each member gets a portion of the shares to sell.
  1. Lead Manager
  • The lead manager is the investment bank or banks that manage an IPO. The lead manager plays a critical role in deciding the financial details of the IPO, helps draft the prospectus, and communicates with regulatory bodies.
  1. Hot Issue
  • A hot issue is an IPO for which the demand from investors is high. Hot issues are often oversubscribed and have a strong performance on their debut, with the share price rising significantly.
  1. Cold Issue
  • A cold issue is an IPO that has received a poor response from the market with less demand from investors than the number of shares issued. The shares of a cold issue often trade below the offer price.
  1. Pricing Date
  • The pricing date is the day on which the final price of the IPO is determined. This is usually done after the close of the book-building process, and a day before the IPO is available for subscription.
  1. Float
  • Float, in the context of an IPO, refers to the number of shares a company offers to the public for purchase during its initial offering. This does not include shares held by promoters, other companies, or government entities.
  1. Issue Size
  • The issue size refers to the total value of the IPO. It’s calculated by multiplying the number of shares offered by the IPO price.
  1. Market Capitalization
  • Market capitalization, or market cap, refers to the total value of all a company’s shares of stock. It is calculated by multiplying the company’s total number of shares by the current market price of one share. It provides a measure of a company’s size or market value.
  1. Anchor Investors
  • Anchor investors are institutional investors who are invited to subscribe to shares before the IPO opens for the public. Their participation is seen as a vote of confidence in the company’s prospects.
  1. Listing Date
  • The listing date is the day on which the shares of the company are first traded on the public stock exchange after the IPO. From this date onwards, any investor can buy the shares of the company.
  1. Subscription
  • Subscription in an IPO context refers to the process by which investors apply to buy shares in a company before they are listed on the stock exchange. The company sets a specific period during which investors can subscribe or apply for shares.
  1. Allotment
  • Allotment refers to the process by which the company distributes shares to the applicants during an IPO. If the IPO is oversubscribed, the shares are distributed on a pro-rata basis.
  1. Cornerstone Investor
  • A cornerstone investor is a pre-IPO investor who makes a commitment to finance a significant part of the IPO, and in return, they receive a large allocation of shares. They also commit to hold their shares for a certain period.
  1. Grey Market
  • The grey market is an unofficial market where the trading of a company’s shares happens before the official listing of shares on the stock exchange. Prices in this market are indicative of the IPO’s potential performance.
  1. SEBI
  • The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It protects the interests of investors in securities and promotes and regulates the securities market.
  1. SEC
  • The U.S. Securities and Exchange Commission (SEC) is the American counterpart of SEBI. It’s an independent agency of the U.S. federal government, tasked with enforcing federal securities laws and regulating the securities industry.
  1. Investment Banks
  • Investment banks are financial intermediaries that help companies go public, raise additional capital, provide research, and offer guidance on mergers and acquisitions. They play a crucial role in the IPO process.
  1. Due Diligence
  • Due diligence is the investigation conducted by the underwriters before the IPO. It involves a thorough check of all material facts in regards to a sale including reviewing the financial records, past performance, legal implications, and anything else deemed material.
  1. Shareholders
  • Shareholders are individuals, entities, or institutions that own shares in a corporation. They are the owners of the company and they have voting rights and may receive dividends.
  1. Retail Investors
  • Retail investors are individual investors who buy and sell securities for their personal account, and not for another company or organization. They buy shares during an IPO based on their own analysis, and they often have smaller investment amounts than institutional investors.
  1. Institutional Investors
  • Institutional investors are organizations that invest on behalf of their members. This group includes investment banks, mutual funds, pension funds, insurance companies, hedge funds, and endowment funds. They often have more resources for investment research and execute larger trades than retail investors.
  1. Public Company
  • A public company is a corporation that has issued securities through an IPO and is traded on at least one stock exchange or in the over-the-counter market. Although a small percentage of shares are initially floated, the act of going public opens the door for more shares to be publicly traded.
  1. Private Company
  • A private company is a corporation that is owned by a relatively small number of shareholders and does not offer or trade its company stock (shares) to the general public on the stock market exchanges, but rather the company’s stock is offered, owned and traded or exchanged privately.
  1. Listing Agreement
  • A listing agreement is a contract between a company and a stock exchange that permits the company to list its shares on that exchange. The agreement ensures that the company complies with the rules and regulations set by the exchange.
  1. Equity
  • In finance, equity is ownership in any asset after all debts associated with that asset are paid off. For a company, equity represents ownership interest in the corporation, typically in the form of shares of stock held by its shareholders.
  1. Stock Exchange
  • A stock exchange is a regulated marketplace that connects buyers and sellers of various financial securities such as stocks, bonds, and commodities. The exchange provides a transparent, regulated, and convenient marketplace for buyers to conduct business with sellers.
  1. Stock
  • Stock represents ownership in a corporation and constitutes a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Stocks are bought and sold predominantly on stock exchanges.
  1. Capital
  • Capital refers to financial resources or assets owned by a business that are useful in promoting productivity and increasing the capacity to create wealth. In terms of IPO, capital can be raised to fund expansion, pay off debts, or finance other corporate initiatives.
  1. Blue Sky Laws
  • Blue Sky Laws are state regulations in the United States that aim to protect investors against fraudulent sales practices and activities. These laws require issuers of securities to be registered and to disclose details of their offerings.
  1. Book Runner
  • A book runner is the main underwriter or lead-manager in the issuance of new equity, debt, or securities instruments. They’re responsible for maintaining the book of securities sold and play a crucial role in the IPO process.
  1. Broker
  • A broker is a person or firm that conducts transactions on behalf of a client. They act as an intermediary between buyers and sellers and often have access to multiple exchanges or other trading venues.
  1. Bulls and Bears
  • A bull market is characterized by optimism, investor confidence, and expectations that strong results should continue. A bear market is the opposite, characterized by falling prices and typically shrouded in pessimism.
  1. Dutch Auction
  • A Dutch Auction is a public offering auction structure in which the price of the offering is set after taking in all bids to determine the highest price at which the total offering can be sold.
  1. Earnings Per Share (EPS)
  • Earnings Per Share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. It serves as an indicator of a company’s profitability.
  1. Follow-On Public Offer (FPO)
  • A Follow-On Public Offer (FPO) is the issuance of shares to investors by a public company that is already listed on an exchange. It provides a way for companies to raise additional equity capital in the markets.
  1. Free Float
  • Free Float refers to the number of shares available to the public for trading. It doesn’t include promoter-held shares or shares held by government bodies and is considered a better measure of market liquidity.
  1. Full-Service Broker
  • A Full-Service Broker provides a wide variety of services to its clients, including research and advice, retirement planning, tax advice, and more. These brokers provide comprehensive financial services beyond simply executing trades.
  1. Market Order
  • A Market Order is a request by an investor to buy or sell a security at the best available price in the current market. It is widely used due to its simplicity and high execution likelihood.
  1. Offer Date
  • The Offer Date is the date when a security is first made available for public trading. It signifies the commencement of the public phase of an IPO, allowing investors to start placing orders for the stock.
  1. Opening Price
  • The Opening Price is the price at which a security first trades upon the opening of an exchange on a given trading day. It is an important marker for that day’s trading activity.
  1. Limit Order
  • A Limit Order is an order placed with a brokerage to execute a trade at a specific price or better. It provides control over the price at which the trade is executed, but there is the risk that the order may not be filled.
  1. Participating Preferred Stock
  • Participating Preferred Stock is a type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate as well as an additional dividend based on some predetermined condition.
  1. Price/Earnings-to-Growth (PEG) Ratio
  • The Price/Earnings-to-Growth (PEG) Ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share, and the company’s expected growth. It provides a broader picture than the P/E ratio.
  1. Public Float
  • Public Float refers to the portion of a company’s outstanding shares that is in the hands of public investors, as opposed to company officers, directors, or controlling-interest investors. It’s a key factor in determining a company’s market capitalization.
  1. Tender Offer
  • A Tender Offer is an offer to purchase some or all of shareholders’ shares in a corporation. This is typically made by another business in an effort to take over the company.
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