What exactly is an IPO and what does it means for the company? The Economic Times helps explain this complex process as Virgin America files for its initial public stock offering.
What is an IPO? Initial public offering (IPO) is an offering of stock or shares to the general public by a company which wants to raise capital for the first time.
Following an IPO, the company gets listed and its shares are traded on stock exchanges.
Who gets the money in an IPO? The money paid by investors for an IPO goes directly to the company.
Once the permission to trade these shares are granted to shareholders, the profit or loss incurred on the transactions accrues to the shareholders.
The future profits made by a company are also distributed among shareholders as dividend.
How is the IPO done? IPOs can be made through the fixed price method, book building method or a combination of both.
In the fixed price method, the price at which the securities are offered is fixed in advance. In the book building method, the investors have to bid for shares within a price band specified by the issuer and the final price is decided after observing the result of the bidding.
How is the price band decided? Most companies are free to price their shares, but some must request permission. The prices are decided by the company's board of directors after consulting a bookrunner.
After deciding the band, bids are invited on all prices of the band. Once the book is closed, the seller fixes the price at which all of its shares will get sold.