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An initial public offering (IPO): basic terminologies

What is IPO
It is the process of selling shares that were so far privately held to new investors for the first time IPO. It is the process for an unlisted company (called issuer) to go public and offer shares to general public investors. The main purpose of an IPO is to raise capital for the company. The IPOs are very effective at raising capital.

Primary market
The market in which investors have the first opportunity to buy a newly issued security like in an IPO.

Prospectus
A formal legal document describing the details of the company is created for a proposed IPO. It is the document that makes investors aware of the risks of an investment.

Underwriting
It is the process by which investment bankers (appointed for the issue) raise investment capital from general investors on behalf of the issuer. The word "underwriter" is also called risk taker as new issues are brought to market by an underwriters in which they take the responsibility (and risk) of selling its specific allotment.

Book Building
The process by which an the attempt is being made to determine at what price the securities to be offered based on demand from investors. An electronic book is being built by accepting orders from the investors who indicate the number of shares they desire and the price they are willing to pay.

Over subscription
A situation in which the demand for shares offered in an IPO exceeds the number of shares issued.

Green shoe option
It is referred to as an over-allotment option. It is a provision contained in an underwriting agreement whereby the underwriter gets the right to sell investors more shares than originally planned by the issuer in case the demand for a security issue proves higher than expected.

Procedure of IPO:
An IPO is usually underwritten by one or more underwriters called as a "syndicate" of investment banks. The company offering its shares enters a contract with a lead underwriter to sell its shares to the public by book building process. The underwriter then approaches investors with offers to sell these shares. Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold.

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