SpaceX is the hottest name in the investing world this summer. As a financial advisor, I can't leave my house without someone asking what's going on with SpaceX. Is Elon really a trillionaire? Why does a company go public in the first place? If I buy a share of SpaceX is that really my ticket to Mars?
Everyone wants to get in on the hype of IPOs and most people don't even know what they are, so today we are going to walk through a few things:
What is an IPO?
Why Do Companies Go Public?
The IPO Process
Pros and Cons of IPOs
So let's dive in, What is an IPO?
An IPO, or Initial Public Offering, is the process in which a private company offers its shares to the public for the very first time.
Why Do Companies Go Public?
The main reason a company would choose to go public is money. Companies want to sell stock to raise massive amounts of money to fund growth, launch new products, or pay debt. It also allows founders, employees and private investors to convert their private ownership into cash by selling their shares.
Now, I know what you're thinking, If this was the first time shares were offered, how are there already investors? Well, the simple explanation is that private companies issue shares long before they go public.
Before a company ever considers an IPO, it usually raises money through several private funding rounds. During these rounds, it sells shares to a small group of sophisticated investors. These aren't available to the general public. So an IPO is their opportunity to realize a gain on their investment.
The IPO Process
There are 4 major steps to the IPO process and it all starts with underwriting.
The company that is going public hire investment banks to organize the process, evaluate it's financials, and help determine a fair initial price for the shares.
Next, the filing. The company files a detailed registration documents with securities regulators outlining it's financials, business models, and risks.
Then, the company gets to show off a little bit. Company executives travel around presenting the business to institutional investors to generate some hype and gauge demand to help set the final IPO price.
Finally, on the official launch day, the shares are priced and begin trading on the public market.
So what are the pros and cons for an IPO?
For companies:
The pros are simple, access to massive capital and brand recognition
The cons? High cost, ongoing compliance, and performance pressure.
For you:
The pros: Opportunity for early growth and diversification
The Cons: Volatility, hype vs. reality, and IPOs typically don't perform well in their first year.
We have already seen the biggest IPO in history this year with SpaceX, and soon we are going to see two more with Anthropic and OpenAI right around the corner, everyone is trying to cash in on the AI hype train. This is a fun time to be an investor, it's more accessible than ever before in history with fractional shares and apps that you can use right in your pocket. The warning here is just be careful, a lot of investors are going to get burned buying into IPO out of fear of missing out or being left behind. My advice? Do your research, often the value that you're getting with an IPO isn't great.