Companies do not just start on stock exchanges. They are formed by private parties as a private company. It is only after they establish their business and hopefully prove themselves that they make an initial public offering or an IPO. I do not mean to sound condescending, but I’ve learned that even people who are advanced in certain respects stumble on some basics..
An initial public offering is the first time that a stock is sold to the public at large with no limits on the kind of investor. Normally, this is where a company receives a stock ticker and starts being freely traded. Up until that point the stakeholders of a company had to jump through some hoops to sell their partial ownership. What hoops is not important.
That really is the basics about what an IPO is. Really from an investors perspective an IPO is the beginning of the company. Now instead of looking at the mechanism we should look to what certain IPO investors hope to get. I am sure most readers are aware of the dotcom bubble, and how the bump these companies got after the IPO. That is what made IPOs so popular. Even after the dotcoms collapsed IPOs are still expected to pop on the first day, allowing people who get in early to profit. In my opinion, those days are dead. The bumps will still happen, but they are the exceptions rather than the rule. Even the bumps are minor. Facebook went up a bit before plunging.
My advice is to avoid IPOs. They are either fully priced or completely untested. You are better off looking for something that is market tested. Or play FDA approvals, because at least those are pretty certain to go up or tank. The people who invested in the company early have a very low average if you will. If the stock opens flat they still make a ton of money. As a retailer avoid it. Even good companies will decline after the IPO fever, maybe jump in then.
Here is a key thing about IPOs. The shares that the company sell to the public enrich them. They have every reason to price it at the peak. These are sold to underwriters who sell them yet again and to make a profit they need to sell it even more. The people who buy from underwriters are institutions and rich people. There is not much left for the rest of us. All that happens BEFORE shares hit the market. All these people want to see a profit, so every offer is fully priced or over priced. Rarely is an initial public offering undervalued.