What is an Initial Public Offering (IPO)?

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An IPO is the process by which a company sells shares to the general public (often this is for the first time). Investment banks facilitate the transaction. Examples of top firms include Goldman Sachs and Morgan Stanley.

Here’s an example of how things work: ABC Corp. retains Goldman Sachs to do an IPO. The firm performs due diligence on ABC Corp, a process of checking the books to make sure everything is in good financial shape.

Goldman Sachs will determine the number of shares to be offered and the price. So let’s say it decides that ABC Corp. should sell 5 million shares at $10 each. In this case, the gross amount to be raised will be $50 million. However, for its efforts, Goldman Sachs will get a percentage of this as its fee, which could be anywhere from 2% to 7%.

Once ABC Corp. is public, the shares will begin trading on a stock exchange, such as the NYSE or NASDAQ.

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