{"id":24231,"date":"2021-02-11T03:01:00","date_gmt":"2021-02-11T03:01:00","guid":{"rendered":"https:\/\/www.lifeandnews.com\/articles\/?p=24231"},"modified":"2021-02-12T12:08:36","modified_gmt":"2021-02-12T12:08:36","slug":"investors-swoon-over-bumbles-ipo-but-what-exactly-is-an-initial-public-offering","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/investors-swoon-over-bumbles-ipo-but-what-exactly-is-an-initial-public-offering\/","title":{"rendered":"Investors swoon over Bumble’s IPO \u2013 but what exactly is an initial public offering?"},"content":{"rendered":"\n

Jonathan T. Fluharty-Jaidee<\/a>, West Virginia University<\/a><\/em><\/p>\n\n\n\n

Bumble raised US$2.15 billion in an initial public offering<\/a>, or IPO, late on Feb. 10, just in time for Valentine\u2019s Day. Investors swooned over the women-go-first dating app, buying more shares and at a higher price than initially expected, valuing the company at $8.3 billion.<\/p>\n\n\n\n

But what exactly is an IPO?<\/p>\n\n\n\n

As a finance professor<\/a>, I believe understanding IPOs are an important part of knowing how markets work. More interesting to me, however, is how a new type of IPO is growing in popularity \u2013 including among the Redditors who are upending financial markets \u2013 and allowing more investors than ever to buy into the \u201chype\u201d when a company goes public.<\/p>\n\n\n\n

Why companies go public<\/h2>\n\n\n\n

Companies use IPOs \u2013 known as \u201cgoing public\u201d \u2013 to access the deep pockets of the U.S. stock market. At the end of 2020, the IPO market was valued at over $50 trillion<\/a>.<\/p>\n\n\n\n

To understand what an IPO is<\/a>, think about starting a private business. You might deposit $50,000 into a bank account, purchase equipment and start operations. However, eventually, you will run out of money if you need to expand \u2013 especially if you are growing quickly.<\/p>\n\n\n\n

To make life a little easier, you may attempt to obtain money from your friends or family or secure a loan from a bank. Similarly, public companies can access the stock market to raise money from investors in exchange for the promise of future profits and returns.<\/p>\n\n\n\n

But in order to do that, first the company must go public.<\/p>\n\n\n\n

When a business decides to go through with an IPO, it first goes to an investment banker \u2013 the same way you might go to a real estate broker when you decide to sell your house. The banker does all the same things that a broker might do, such as appraising the business by determining its value and risk and trying to match the company that is going public with well-heeled buyers who might be interested in buying a share of it.<\/p>\n\n\n\n

In some cases, the banker might act more like a used car dealer, in which case the investment bank buys the company\u2019s shares for a set price and then sells them to other investors later on at \u2013 it hopes \u2013 a profit.<\/p>\n\n\n\n

In any case, the company going public doesn\u2019t sell its new shares to \u201cregular investors.\u201d Instead the banks handling the deal turn to their favored wealthy clients, who initially buy shares and then sell them on to the public when the stock begins trading \u2013 usually at much higher prices than they paid. Legal restrictions<\/a> mean the average individual cannot buy shares directly from an investment bank. So you typically need to be an accredited investor to be qualified, and trading app Robinhood\u2019s army of day traders likely wouldn\u2019t be eligible.<\/p>\n\n\n\n

Success for an IPO typically means two things: The company gets as much as or more money than it aimed for, and the price \u201cpops\u201d on the first day of trading.<\/p>\n\n\n\n

In Bumble\u2019s case, it initially offered 34.5 million shares<\/a> at a price of $28 to $30, but overwhelming demand meant<\/a> it was able to sell 50 million at $43. That allowed it to raise well more than double the capital it had earlier planned on.<\/p>\n\n\n\n

As far as whether early investors will get a first-day boost, BMBL surged to $70.31<\/a> on Feb. 11 in its first day of trading on the NASDAQ stock exchange, creating a hefty profit for investors who bought into the IPO and sold their shares.<\/p>\n\n\n\n

Rise of the SPAC<\/h2>\n\n\n\n

However, there\u2019s a new IPO method in town that is becoming an increasingly common way for companies to go public: the SPAC IPO.<\/p>\n\n\n\n

SPAC stands for special purpose acquisition company, and they have suddenly become the next big thing among Redditors on WallStreetBets<\/a> who fueled the skyrocketing prices<\/a> of GameStop, AMC, silver and other securities in recent weeks. The zero-comission trading app Robinhood, which had been the Redditors\u2019 favored place to buy stocks, is even considering doing a SPAC<\/a> rather than a normal IPO as it seeks to go public.<\/p>\n\n\n\n

The difference is that a SPAC is like an IPO in reverse. An investor-led fund does an actual IPO \u2013 raising money from other elite Wall Street types \u2013 but with a shell of a company that has no operations. Known as a \u201cblank check\u201d business, its entire purpose is to eventually purchase an unspecified private company, thus making it public as well, and typically has two years to do it<\/a>.<\/p>\n\n\n\n

In 2020, there were about the same number of traditional IPOs as SPACs<\/a> for the first time since the first SPAC was created in 2003<\/a>.<\/p>\n\n\n\n

The upshot is that essentially anyone can invest in a SPAC and acquire a piece of the once-private company. Of course, this is also a very speculative investment, and it\u2019s easy to lose everything. But that can be true of any IPO, which have historically underperformed the market<\/a>.<\/p>\n\n\n\n

In other words, as always, buyer beware<\/a>.<\/p>\n\n\n\n

[Insight, in your inbox each day.<\/em> You can get it with The Conversation\u2019s email newsletter<\/a>.]<\/p>\n\n\n\n

Jonathan T. Fluharty-Jaidee<\/a>, Assistant Department Chair and Professor of Finance, West Virginia University<\/a><\/em><\/p>\n\n\n\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Jonathan T. Fluharty-Jaidee, West Virginia University Bumble raised US$2.15 billion in an initial public offering, or IPO, late on Feb. 10, just in time for Valentine\u2019s Day. Investors swooned over the women-go-first dating app, buying more shares and at a higher price than initially expected, valuing the company at $8.3 billion. But what exactly is […]<\/p>\n","protected":false},"author":44,"featured_media":24233,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5,277],"tags":[5017,1837,6303,9444,4927,9445,4318,1205,2259,9446],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/24231"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/44"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=24231"}],"version-history":[{"count":1,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/24231\/revisions"}],"predecessor-version":[{"id":24234,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/24231\/revisions\/24234"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/24233"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=24231"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=24231"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=24231"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}