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How do initial public offerings work?
Home » Investing » Initial Public Offering » How do initial public offerings work?IPOs typically engage the assistance of one or more investment banks that will serve as "underwriters". The company that makes its shares available is called the "issuer" and secures a contract with a lead underwriter to offer its shares to the public. Investors will then be sought out by the underwriter with offers to sell the shares.
When an IPO is sold, the sale of the shares can take several forms. Some of the most common methods are Dutch auction, Firm commitment, Best efforts, Bought deal, and Self Distribution of Stock.
If the IPO is large, it is typically underwritten by a number of investment banks called a "syndicate" and is led by one or two major investment banks called the lead underwriter. When shares are sold, the underwriters retain a commission determined by a percentage of the value of the shares they sell. The lead underwriters, which sell the greatest proportions of the IPO receive the highest commissions. These commissions can be as high as eight percent.
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