Market Minute - March 12, 2019

IPO Market

by Scott Rosenquist, CFA​

This year is set to be a potential record for the IPO market.  Some well-known companies plan on going public in 2019 and will grab the market’s attention as their shares begin to trade for the first time.

Uber and rival Lyft have filed to go public and the market will be watching closely as they could be large offerings in terms of size.  I’d like to take a minute to discuss what an IPO is and what it means for the financial markets.

An initial public offering (IPO) is the first time a company issues stock to the public.  This process is commonly referred to as going public and it allows investors to purchase shares of the once private company.  A company can raise capital through an IPO for expansion and growth while also giving the original owners of the company liquidity now that the shares are publicly traded.  Public companies are subject to more regulations and financial disclosure requirements.  This allows investors to gauge the company’s prospects prior to making an investment.         

The number of publicly traded companies has fallen steadily over the years for several reasons.  In the U.S., the number of stocks has dropped by almost half over the past 20 years.  Merger and acquisition activity have reduced the number of companies and stocks that are publicly traded.  Companies can go bankrupt or delist from an exchange, further reducing the number of listed stocks.  Corporations are also buying back their own shares which is reducing the share count for several companies.  Businesses are staying private longer due to less regulatory pressures and ample access to capital.  Investors who specialize in private company investments, including private equity and venture capital funds, have allowed some companies to grow rather large without an IPO.  For example, Uber could potentially be the largest IPO in history later this year.

The Securities and Exchange Commission made a proposal last month in an effort to increase the number of publicly traded companies.  If approved, larger private companies will be able to “test the waters” prior to filing for an IPO.  The market and investors should welcome any news that promotes more public companies.  It would allow individual investors more exposure to innovative companies of the future.


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