Initial Public Offering

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What Is Initial Public Offering?

An initial public offering (IPO) is the process by which a private company first sells shares to the public and lists them on a stock exchange, raising capital and letting outside investors buy ownership. IPOs are a normal feature of financial markets, but they can become objects of speculation when enthusiasm runs high. The late-1990s dot-com era was closely associated with a frenzy around IPOs, in which many internet companies saw huge first-day price gains. In November 1998, for example, theglobe.com's stock rose more than 600% on its first day of trading, an emblem of the mania.

Why It Matters

IPOs matter to the study of crashes because they concentrate the optimism — and sometimes the excess — of a booming market. During the dot-com bubble, companies with little or no profit could go public at soaring valuations based on metrics like website traffic rather than earnings, and the surge of internet listings drew in venture capital and retail investors alike. When the NASDAQ Composite peaked in March 2000 and then fell about 78% by 2002, many of these newly public companies collapsed, from Pets.com to Webvan. The IPO frenzy illustrates how the market for new stock issues can both fuel a bubble and reveal its fragility once sentiment turns.