What is an 'initial public offering' (IPO)?

An initial public offering (IPO) refers to the process by which a private company offers its shares to the public for the first time. This process marks a significant transition for a company, as it moves from being privately held to publicly traded. The rationale behind an IPO often involves raising capital to fund expansion, paying off debt, or providing liquidity for existing shareholders. By going public, a company is also able to increase its visibility and credibility in the market.

In the IPO process, a company typically works with investment banks to determine the offering price and to market the shares to potential investors. This event is crucial for the company as it sets the valuation and can significantly impact its future growth potential.

The other options do not accurately describe an IPO. Selling shares to existing shareholders is more aligned with secondary offerings, while buying back shares pertains to share repurchase programs. Lastly, while mergers can involve financial strategies and mechanisms, they are distinct from the process of a company going public for the first time through an IPO.