Initial public offering
An initial public offering, or IPO, is a private company's first sale of shares to the public, after which those shares begin trading on a stock exchange.
See it move
A company sells 5,000,000 shares at €20.00 in its IPO, raising €100,000,000 of gross proceeds. Underwriters charge a 7% fee, €7,000,000, leaving €93,000,000 of net proceeds. If those shares close their first trading day at €23.00, that is 15% underpricing, €15,000,000 of value left on the table.
The formula
Variables
- IPO underpricing (first-day return) (%)
- First-day closing price (€ per share)
- IPO offer price (€ per share)
Measures the percentage gain an investor who bought at the IPO offer price would have made by the end of the first day of trading.
Check yourself
A company sells 2,000,000 new shares in its IPO at an offer price of €15.00. On the first day of trading, the shares close at €16.80. What is the IPO underpricing (first-day return)?