Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A client is interested in purchasing shares of a company that is currently undergoing its Initial Public Offering (IPO). Which of the following statements about IPOs is TRUE?
- AIPO shares are distributed to the public by an underwriting syndicate in the primary market.
- BIPO shares are typically purchased in the secondary market.
- CThe price of IPO shares is determined by market supply and demand immediately after the offering.
- DAll investors have equal access to purchase IPO shares at the initial offer price.
Show answer & explanationAnswer & explanation
Correct answer: A. IPO shares are distributed to the public by an underwriting syndicate in the primary market.
An IPO is the first time a company offers its shares to the public, occurring in the primary market. An underwriting syndicate, typically led by an investment bank, facilitates the distribution of these new shares.
Why the other options are wrong
- B. IPO shares are initially purchased in the primary market, not the secondary market.
- C. The initial offer price is set by the underwriters, not by immediate market supply and demand.
- D. Access to IPO shares at the initial offer price is often limited and prioritized, not equally available to all investors.
Initial Public Offering (IPO)
An IPO is the first sale of stock by a private company to the public, marking its transition from private to public ownership.
- Occurs in the primary market.
- Facilitated by investment banks (underwriters).
- Company raises capital for the first time from the public.
Memory trick: IPO: 'Introduce' to the 'Public' 'Original' shares.