An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering. Before an IPO, a company is considered private. As a pre-IPO private company, the business has grown with a relatively small number of shareholders including early investors like the founders, family, and friends along with professional investors such as venture capitalists or angel investors. An IPO is a big step for a company as it provides the company with access to raising a lot of money. This gives the company a greater ability to grow and expand. The increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well.
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What is an IPO?
Types of IPO:
Fixed Price Offering – Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares.
Book Building Offering – In the case of book building, the company initiating an IPO offers a 20% price band on the stocks to the investors. The interested investors bid on the shares before the final price is decided. IPO is used by small and medium enterprises, startups and other new companies to expand, improve their existing business. An IPO is a way for companies to acquire fresh capital, which in turn can be used to finance research, fund capital expenditure, reduce debt and explore other opportunities. An IPO will also bring transparency into affairs of the company since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges. The company’s investment in various equity and bond instruments will come under greater scrutiny after it gets listed. The IPO of any company brings a great deal of attention and credibility. Analysts around the world report on investment decisions of the clients.
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Benefits/Features of an IPO:
- Get in on the action early – By investing in an IPO, you can enter the ‘ground floor’ of a company with a high growth potential. An IPO may be your window to rapid profit in a short time period. It may also help grow your wealth in the long run. Suppose, you invest in a young company that sells disruptive technology. If it manages to sway the market and rake in profits, you would gain from its success too.
- Meet long-term goals – IPO investments are equity investments. So, they have the potential to bring in big returns in the long term. The corpus earned can help you to fulfil long-term financial goals like retirement or buying a house. Besides, the Indian IPO market is growing.
- More price transparency – The price per security issued is clearly mentioned in the IPO order document. So, you have access to the same information as bigger investors. This would change in the post-IPO scenario. The share prices after the IPO would depend on changing market rates and the best price that the stockbroker can offer.
- Buy small, earn big – The IPO price is often the cheapest price if you invest in a small company that has the potential to grow big. That is because the company may offer a discounted rate. If you miss the IPO window, investing in that promising company may be difficult because the stock price may skyrocket. Can raise additional funds in the future through secondary offerings.
- Attracts and retains better management and skilled employees through liquid stock equity participation (e.g. ESOPs) – IPOs can give a company a lower cost of capital for both equity and debt.
Asset allocation stabilities your risk and reward by allocating your assets
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Financial instrument that holds some type of monetary value
Mobilize small savings in the form of investment
Why is an IPO important?
Investors betting on an IPO can earn handsome returns if they are wise and have some expertise. They can form a choice by going through the prospectus of the companies initiating IPO. They need to go through the IPO prospectus carefully to form an informed idea about the company’s business plan and its purpose for raising stocks in the market. However, one must be watchful and have a clear understanding of analysing financial metrics in order to identify the opportunities. An unlisted company (A company which is not listed on the stock exchange) announces an initial public offering (IPO) when it decides to raise funds through sale of securities or shares for the first time to the public. In other words, IPO is the selling of securities to the public in the primary market. A primary market deals with new securities being issued for the first time. After listing on the stock exchange, the company becomes a publicly-traded company and the shares of the firm can be traded freely in the open market.
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