Final answer:
An IPO is a company's first sale of stock to the public, providing funds for repaying initial investors and securing capital for expansion. Investors purchase shares, and earn returns through dividends and capital gains.
Step-by-step explanation:
An initial public offering, or IPO, allows investors to pay a small amount for a share of a business. When a firm conducts an IPO, it is selling shares of its stock to the public for the first time, which includes individuals, mutual funds, insurance companies, and pension funds. The primary reasons for an IPO include providing funds to repay early-stage investors such as angel investors and venture capital firms, and to acquire financial capital for the company’s expansion. Venture capital firms that own a significant portion of the company, like a 40% stake for example, can sell their part ownership of the company to the public via the IPO.
After the IPO, whenever stock is sold by one investor to another, the company itself does not receive money from that transaction. Shareholders can earn a return on their investment through dividends and capital gains when the value of the stock increases.