An IPO is the first offering of stock to the general public.
In an IPO, a firm hires an underwriter. An underwriter is normally an investment bank that purchases the shares off the company and on sells them to the market. To compensate the underwriters, the company provides the underwriters a spread. A spread is the difference between the public offer price and the price paid by the underwriter.
An underwriter is also involved with the legal side of an IPO, the valuation of the company and the preparation of a prospectus. A prospectus is a formal summary of the company, including what it does, what it intends to do and financial information.
Underpricing: IPOs tend to be underpriced. This is done to attract investors and ensure all equity is raised. The level of underpricing varies from company to company. However, the very fact that IPOs are underpriced makes IPOs an attractive investment.