Final answer:
IPOs are typically underpriced to ensure a price increase in the initial trading days, benefiting early investors and creating positive market momentum.
Step-by-step explanation:
It is true that IPOs (initial public offerings) are typically underpriced. This underpricing is done so that the price rises during the first few days of trading, creating a positive market momentum and rewarding early investors. Angel investors and venture capital firms, who have invested in the company at early stages, benefit from an IPO as it allows them to recoup their investments and potentially realize significant returns if the stock price appreciates quickly post-IPO.
The management of small companies might prefer to conduct an IPO immediately to generate capital, but the public may be hesitant to pay a high price for such stock due to the inherent risks before the company is well-established. After an IPO, the funds received enable companies to expand operations substantially and create more stable financial footing.