Initial Public Offering aka the first time a company “goes public”. It is the first time a company offers shares of its equity ownership, or stock, out for anyone, like you and me, to buy and invest.
Why are they doing this? To get that money – for the company and for the existing investors. The core concept behind it is that a company is asking a broader set of people to invest in their company. If a company’s sales revenue doesn’t cover all of their needs – either operating costs are high before sales have really taken off, or they want to expand and hire more people or build a factory – they need to find outside sources of cash. Just like you, they can ask the bank for a loan, or they can also sell ownership (equity/stock) of their company to someone for the promise that the company will be more valuable in the future.
So what were they doing before? They were private. The private investor party is exclusive. You need that hook up. You’ve heard about the angel and venture investors, the professionals who have the connections to get themselves in the door. Private investors give companies money early on, with the hope that their share is going to be much more valuable when they have the opportunity to sell it. The best time to sell it…is when it goes public! And they now have endless people to sell their shares to, and get their cash.