There’s a great deal of jargon associated with the investing world, and one of the terms you may often hear is “initial public offering,” or IPO for short. This term is used to describe a private company offering stocks to the general public for the first time.

But what does an IPO mean for you as an investor? Though this process may seem like an opportunity to buy shares of a new stock issuance and make a great deal of money, there are also risks, including losing much of your investment.

What does IPO mean? 

An IPO is the process of a private company becoming a publicly traded company. As part of this move, members of the public can buy shares of the company for the first time. This process is sometimes also referred to simply as “going public.” There are several steps a company must take in order to go public.

“The company hires an underwriter—typically an investment bank—to help value the private company and gauge interest in the shares,” says Andrew Crowell, financial adviser and vice chairman of wealth management for D.A. Davidson. “The investment bank then sets the initial offering price for the shares. After the public offering, the shares trade on an exchange.”

IPOs are often viewed as an opportunity for the general public to make a lot of money, but that’s not always the way things turn out. There are a variety of reasons buying an IPO may not pan out as you hoped.

“Certainly, getting in on the ground floor of the next big thing has its allure, but that’s not assured,” continues Crowell. “Typically, the financials for the company when it was private are not as transparent or readily available. Further, the initial share price set by the investment banker may overstate or understate the actual value of the underlying enterprise.”

Why do companies go public?  

There are many different reasons why a company decides to go public, and all different types of companies may opt to take this step—both old and new. In many…

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