1. StocksQuest Online Stock Simulation Game
Lesson #10 What is an Initial Public Offering (IPO)?
Background: There are actually two different markets for stocks: the primary and
secondary markets. In the primary market, a company decides to go public, meaning it
will sell stocks to the public to raise money the first time. These new shares for sale to
the public are called Initial Public Offering (IPO). Buyers (usually institution investors) of
these new shares of stock will later sell them to the stock market known as the
secondary market.
When investors resell these new shares to the stock market, the companies that first
offered the IPOs don’t receive additional money in the secondary market. Sometimes,
insiders (founders and employees) of a company decide to sell their own shares to the
public after the IPOs. This is called a secondary offering. In this situation, the
employees/shareholders, not the company, receive the money.
Once a company decides to go public, it appoints a lead underwriter to carry on the
process. Brokerage firms such as Goldman Sachs, Merrill Lynch, and Morgan Stanley
Dean Witter are the top underwriters. The company first has to officially register the
IPO with the Securities and Exchanges Commission (SEC). Next, the company
prepares a business document called the “prospectus.” This document includes
financial data, business descriptions, management teams, risk factors, competition
analysis, and business plans of the company.
Then, the company’s management team performs a tour, called the road show, to major
U. S. cities such as New York City, Los Angeles, Chicago, Boston, and San Francisco
to meet with prospective investors about the IPO. Only institutional investors, money
managers, and analysts are invited. In these crucial meetings, investors indicate their
interest in purchasing a stake in the IPOs.
After the road show, the management of the company and the underwriters determine
the share price and the size of the offering. Once the final price is set and the final
prospectuses are distributed, the IPO starts selling to investors. After the lead
underwriter works out the details with the syndicate on the date of the IPO, shares of
the stock may resell to the public in the secondary market. Usually, this happens late
on the date or the next day of the IPO.
Bertrandt

2. Define the following terms:
IPO –
Primary Market-
Secondary Market-
Institutional Investor-
Insiders-
Outsiders-
Underwriters (Who are they and what do they do?)
Prospectus-
Activities: Investing in an IPO can be extremely profitable because investors are
constantly looking out for the next Microsoft and Cisco. On the other hand, it can be a
very risky investment. For example, Theglobe.com was traded at 250% above its initial
offering price the first day of the IPO. Nevertheless, its share price dropped below the
offering price a year later.
The following tables show the IPOs that were the biggest gainers and losers in the last
12 months. Answer the questions that follow the tables. Students will get a better idea
for whether or not they feel comfortable investing in IPOs.
Bertrandt

3. %
Offer Recent More
Company Symbol Offer Date Gain/
Price Close Info
Loss
China Fundamental Acq 15-May-
CFQUF $5.00 $7.00 40.00 Profile
Corp 2008
%
Offer Offer Recent
Company Symbol Gain/ More Info
Date Price Close
Loss
14-May- News, Profile, Research,
Verso Paper Corp VRS $12.00 $1.15 -90.42 Insider
2008
GT Solar International 23-Jul- News, Profile, Research,
SOLR $16.50 $3.01 -81.76 Insider
Inc 2008
19-Feb- News, Profile, Research,
Bioheart Inc BHRT $5.25 $1.09 -79.24 Insider
2008
28-May-
Safe Bulkers Inc SB $19.00 $4.99 -73.74 News, Profile, Research
2008
Gushan Environmental 18-Dec-
GU $9.60 $2.55 -73.44 News, Profile, Research
Energy 2007
Orion Energy Systems 18-Dec- News, Profile, Research,
OESX $13.00 $3.59 -72.38 Insider
Inc 2007
China Mass Med Int 4-Aug- News, SEC, Msgs, Profile,
CMM $6.80 $2.01 -70.44 Research
Adv Corp 2008
19-Dec- Chart, News, Msgs,
NetSuite Inc N $26.00 $7.94 -69.46 Profile, Research, Insider
2007
29-Jan-
Cascal NV HOO $12.00 $4.11 -65.75 News, SEC, Msgs, Profile
2008
RHI Entertainment 17-Jun- News, Profile, Research,
RHIE $14.00 $4.81 -65.64 Insider
Inc. 2008
China Distance Educ 29-Jul- News, Msgs, Profile,
DL $7.00 $3.11 -55.57 Research
Hldgs Ltd 2008
Bertrandt

4. 1. Which IPO had the biggest % gain or loss in the past year?
2. Which IPO had the highest initial offering price and what was it?
3. Which IPO had the lowest initial offering price and what was it?
4. Look at the names of the companies that issued IPOs, what trend can you identify in the
types of companies in the past year?
Bertrandt