The Ultimate Guide To Initial Public Offerings (IPOs)

Curious about investing in IPOs? Then this guide is for you.

There are a number of avenues you can take if you decide to invest your money. Maybe you’ll invest in real estate, 401ks, bonds, or even fine art. The stock market is probably the most popular destination for building a diverse portfolio. In the US alone, 54 percent of Americans invest in the stock market, whether through individual stocks, mutual funds, pensions, or retirement plans, according to a Gallup report.


The stock market helps many curious investors start building a portfolio of stocks, but these stocks simply don’t appear from nowhere. Before a company can trade its stock on the market, it must go through the rigorous process of an initial public offering (IPO). Only then can its stock be freely traded.


The unflattering truth is that IPOs aren’t freely available to everyone. They’re exclusive by virtue of being tailored toward private funding rounds and accredited investors. These people ultimately end up taking all the value for themselves before the public gets a chance to invest.


Before we can go deep on the issues facing the modern IPO, let’s get a zoomed-out look first.


What is an IPO?


An initial public offering (IPO) is what happens when a company goes public and offers shares of its stock for sale on a stock exchange. That stock can be traded at profit or loss in response to market demand.


A company could decide to IPO for a number of reasons:


  • To gain capital from a public pool of investors
  • To gain credibility by appearing on the stock exchange
  • To offer stock incentive packages to employees
  • To set up a potential merger or future acquisition


IPOs were all the rage in the dot-com era, when high-profile companies like AOL and Yahoo went public. People made money overnight if a stock had sufficient demand. Consider how Yahoo’s share price climbed 154 percent from its initial price on the first day of its IPO.


But chasing IPOs has generally fallen out of favor due to extreme fluctuation across markets. IPOs also fail to offer true value to the retail investor — we’ll go into more detail on this later.


In the following content series, we’ll explain the history of IPOs, how they work as an investment opportunity, and why they aren’t as valuable to the average person as other investment options might be.


If you’re new to IPOs, we suggest you walk through each chapter below to get the lay of the land. You’re also welcome to use the navigation below to jump between chapters.


Chapter 1: The History of Initial Public Offerings

Chapter 2: Who Really Benefits The Most From IPOs?

Chapter 3: Why Companies Get Burned From Modern IPOs

Chapter 4: Why Retail Investors Get Burned From Modern IPOs

Chapter 5: 4 Viable Alternatives To The IPO

Chapter 6: What Does The Future Hold For IPOs?

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