The Return of the Initial Public Offering

After a drought of initial public offerings over the past few years, the IPO market finally began to perk up in the second quarter of 2009 (see chart). If the pace continues to accelerate, it could be a promising signal for investors.

Private companies seeking to raise cash may choose to “go public” by offering shares of ownership on a stock exchange. When a company offers new shares to the public, it’s called a public offering. A great deal of attention focuses on the conditions that draw companies to make their debut or “initial” public offering.

Although it can be difficult for individual investors to get in on an initial offering, IPOs can serve as a useful indicator of the outlook for the stock market as a whole. Companies that want to go public will typically wait for market conditions that could fetch a high price for their shares. Because start-ups are seen as more risky than established firms, investors may give an IPO a cool reception when overall confidence levels (and stock prices) are down.

Predictably, IPOs all but disappeared as the nation battled a recession and a bear market in 2008. It’s no coincidence that the IPO resurgence in 2009 coincided with a stock market rally that began in March of that year.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Although investing in an IPO may not be appropriate for many investors, it’s still a good idea to keep an eye on the pace of new offerings. Signals from the IPO market may yield clues about the health of the broader investing climate.

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