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Underwrite initial order

an initial public offering or IPO is the process where a private company that's owned by a small number of shareholders goes public and is listed on an exchange where it can be owned by a large number of investors let's look at the actual process itself here's an overview of the steps that are required for a company to go public we're going to look at each of these in more detail the first thing that a company will do is select a bank to lead its underwriting process it'll select a bank based on different criteria such as the reputation of the bank the quality of its equity research industry experience and expertise in that sector distribution or the ability to actually sell the deal to investors with traders and salespeople and also if the company has a prior relationship with the bank all of these are going to factor into essentially determining which bank the company believes will get the best price and the most successful IPO for the company then there's due diligence and regulatory filings let's look first at how a company agrees to be sold through its investment bank there are several different types of commitments a firm commitment is where the underwriter purchases the entire offering and sells it to the public therefore the bank takes all the risk those are not very common then there's a best efforts agreement or a market a deal where the underwriter does not guarantee any pricing or take any risk but does its best to sell the offering to the public these are much more common and finally banks often work in syndicates where multiple underwriters work together to sell the deal across several banks there are a lot of documents that have to be filed during this process the first thing that happens is there's an engagement letter between the company going public and the investment bank then there's an underwriting agreement there's a registration statement that has to be filed with the regulators there's a prospectus and multiple versions of the prospectus from preliminary to final that have to be filed with investors and contains all of the information about the company the pricing the valuation the risks and rewards of the investment and then finally there are ongoing public filings that have to be made as well let's look at the actual pricing of an IPO the pricing is determined by investors the investment bank will do as much as they can to market the deal at a certain price but ultimately is up to the investors to decide how much it's worth IP o's are typically priced at a little bit of a discount this is to make sure that they perform well when they start trading on the public market so on average IPOs pop or rise in value in the first few days of trading let's look at stabilization after the shares start to trade on the market the banks will work to stabilize the price of the securities if there are not enough buyers they will step in to buy shares this can only last a short amount of time though as it would require an enormous amount of capital to continue and finally the company transitions to a normal market competition environment where the quiet period mandated by the SEC is over and the company can just rely on ongoing disclosure such as news financial results etc to drive the performance of its shares the investment bank will continue to work with the company as an advisor and help it try to increase its share price over time to learn more check out see FIS FMV a certification program while you learn everything you need to know about being a world-class financial analyst thanks for joining us for this tutorial on the IPO process