Each week we discuss the current happenings of the IPO (Initial Public Offering) market to keep you updated on anything that may be coming up, or events that may have changed. But what exactly is an IPO and why does one even take a company to the public market? Today we will take a simplified approach to explaining it.

So a company can raise money by issuing debt or equity. If a company chooses to do the latter, they can offer shares to the public for sale or offer shares to a private group. Many smaller companies have only a few shareholders (likely friends and family), and there are even a few well known names that only have private shareholders, IKEA and Hallmark Cards are a few you may have heard of.

When a company chooses to "go public" it means that they are obligated to sell some of their shares on an exchange to the public. They can no longer choose who they sell shares to. So why go public? Usually one can answer this in one word... Cash! Usually companies raise a ton of money when they go public and will state what their intentions are for this new funding. This is important because as a potential investor in a new offering you want to make sure that the company is just looking to pay back all their private investors. This is called an "Exit strategy".

When investing in an IPO you want to know that the company plans to use your investment to grow the company, acquire a competing or valuable company, or fill existing orders. This information can be found in the company filings before they offer shares to the public. If searching though documents doesn't excite you, usually the media will comment on why the company is raising money, and often the top management or current leadership will appear on the financial media channels trying to hype their IPO.

Ok, so now it's the IPO day and the company will surely be shown ringing the opening bell on the NYSE or maybe the NASDAQ, and you're all excited to enter. You have read through the filings and you are confident that your investment will be a sound one. When the market opens you race to the computer and try to get in only to find that the stock is not open yet. What happened? Every other stock is open why isn't yours? This is common. Think of it as one last attempt to make people feel like they will miss out. The floor brokers will attempt to make it seem that there is a lot of interest in the new issue. He will attempt to raise the price of the offering before release and see how many people chase. At some point the market and the price will agree and the shares will go out to the public. This can be 20 minutes after the open or as long as 2 hours, it all depends on the interest. In either case don't jump right in.

The first few minutes of a public offering can be a very volatile roller coaster ride. Investors don't want to miss anything and the day traders are in there too. Let the stock settle first, as it always does, and then enter when everyone else is done chasing. This also gives you an opportunity to see the actual interest. If the stock just floats lower and lower then it may seem that it was all hype and there is little activity. If you see wild back and forth then you can be confident that there is a healthy market of buyers.