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What are IPO stocks?

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Quick Answer

IPO stocks are the new stocks offered after a company makes its initial public offering. IPO stock values depend on factors such as the number of shares the company decides to offer and demand for the shares.

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Full Answer

An initial public offering, or IPO, is when a company changes from a private company to a public company. A private company is a company that is privately owned. Before a company goes public, it isusually owned by a combination of the founders, early investors Ñsuch as angel investors andventure capital companies Ñand key employees. When a company goes public, it sells stakes in the company to general shareholders. This helps raise money to re-invest in the business or to expand it, according to CNBC.

Before theIPO, companies make deals with investment banks to sell shares for the IPO and to underwrite it. The investment bankmust file a registration statement withtheSecurities Exchange Commission, orSEC. The SEC is responsible for reviewing, approving and setting a date for the IPO. The investment bank's underwriters then try to stir investor interest in what is called a "road show."

In an IPO, a company offers stakes in its business through shares. The price of these IPO shares isdetermined by the company and the investment bank's underwriters and is based on a number of factors including the demand created through the road show, how much the company is worth,how many shares will be available and how many requests are made for the shares prior to the IPO. IPO shares are sold on the IPO date. In most cases, only institutional investors can buy IPO shares, as this creates more stability. If shares were available to the general public, the price could vary wildly, according to a November 2013 article in Forbes.

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