Before a stock can reach the stock market or an exchange it must first be publicly traded. This would explain why you can’t buy shares of your local grocery store on the stock market. Most companies are similar to your local grocery store; they are held privately by only a few owners.
To become a publicly traded company and issue stock on the stock market, a private company must file an initial public offering (IPO). You might have heard of the term before. It's a big deal in the news and excites investors to investigate a new stock to purchase.
The purpose of the IPO is to provide shares of a private company to the public to purchase. Having the ability to be publicly traded provides the company with more capital to expand and grow. However, the company is now under more scrutiny and is required to be highly transparent with investors.
Think about it like getting your driver's license. Once you reach the age of 16, you are handed over the keys! You now have the freedom to explore, but you have to be diligent and careful of other drivers. If you are not, you can cause an accident.
Similar to having to take a drivers test, a private company must go through a variety of assessments to ensure that all information is correct to qualify for an IPO. The SEC policies this process and makes sure that all information is accurate to provide the public with the highest quality of information.
After a company has passed, its shares are issued to the public for investors to buy. On an IPOs first trading day, they are known to be highly volatile due to their high level of media attention. It is important for investors to investigate the company deeper and consider the risk and reward before making an investment decision.
IPOs are the new shiny car on the block. However, make sure they work before you buy one. Now, let’s get into long and short positions.