How IPOs Work

By: Ed Grabianowski

What is an IPO?

IPO stands for Initial Public Offering. An IPO happens when a privately owned company issues shares of stock to be sold to the general public. This means the company is no longer privately owned, but is owned by a variety of investors, some of whom are not involved with the day-to-day operations of the company -- these investors simply own some of the company's stock, which they purchased on the open market. Although IPOs can vary greatly from one company to another, and they require a long, expensive and complicated process, the IPO is basically a way for the company to make money based on expectations of future success and profit.

The media's focus on high-profile technology IPOs and Internet-related stocks might lead one to think IPOs are somehow linked to the tech sector. In fact, even the most mundane company can have an IPO, and the first IPOs were held in the 1790s (they were called stock subscriptions at the time). A look at the top U.S. IPOs of all time shows few technology companies and no Internet businesses. Standouts include Pepsi Bottling Group, Kraft Foods, MetLife insurance company, international shippers UPS, and the biggest IPO in U.S. history, the wireless division of AT&T. The IPO for Internet search site Google didn't even approach the top 10, despite the media frenzy that surrounded it.