What is an Initial Public Offering?

Initial Public Offering (IPO) is an announcement when a company’s ownership from private going to be public. Investing in an IPO gives a high chance of earning more profit. but high profit comes with high risk. So, it is important to understand how the process of IPO goes and what type of rules are linked with it.

Initial Public Offering (IPO)

Two types of capital (fundraising) markets exist, the primary market and the secondary market. The primary market is the place where fresh fundraising is initiated and the secondary market is those which help in further growth of the primary market. IPO is an important step for raising funds for business growth. Corporate raises funds by issuing IPO in the primary market. 

An IPO is a quick way to raise funds in the market, with this IPO, the company also gets high publicity in the market and its credibility also increases. With the IPO, there is a direct connection established between the company and the investors. The company sells its ownership to the shareholders. The shareholder of the IPO can exit their investment in the secondary market. In the economy, when a more number of IPOs are listed then it is considered a healthy economy. Before IPO a company has few investors which include the founder, the angel investors, and the venture capitalist. 

There are mainly two types of IPOs: Fixed Price Offering- This is the issue price that company set for initial share sales. The demand for the stock can be known when the issue is closed. Any investor taking part in this IPO must pay the full price of the share. Book Building Offering- In this type, the company offers a 20% price band on the stock. The interested investors bid on the share and they specify the amount they are willing to pay for each share. The lowest price is referred to as the floor price and the highest price is referred to as the cap price.

IPO Process Steps

Sharing the ownership of the company with the public is a very time-consuming and difficult process. There is a lot of paperwork that is to be done to meet the requirement of the stock exchange. The IPO process consists of two-part, the first price is the pre-marketing of the offering and the second phase is IPO listing. 

The company advertises that it needs an underwriter to handle the IPO listing process smoothly. The underwriter presents the proposal to the company and the company selects the best underwriter according to their need. An IPO team formed comprises lawyers, accountants, and exchange experts. Documents are prepared in which different information about the company and different paperwork are done to meet the exchange requirement. The underwriter makes the necessary steps to check the best-suited price for a listing of the IPO. 

The Board of Directors is established to ensure the processing of the financial and accounting information of the company. The company issues shares on the IPO date in the primary market and the balance sheet share value is prepared for the company. The stocks of an IPO are given in the Demat account of the bidders within 10 days after the bidding date closes. Going public is a bit expensive process which is why companies with strong fundamentals and highly profitable have the potential to go through an IPO.

IPO vs FPO

A company raises money with the help of an IPO but whenever a company wants to raise more funds by giving more shares to the public after being listed in the stock market FPO comes to play. FPO stands for ‘follow-on public offer’. In the case of IPO, the price is pre-decided by the company but in the case of FPO prices are decided by the market, or the number of shares is increased or decreased by the company. It is found that investing in FPO is less risky than investing in IPO as FPO is launched after the IPO the investor has much information about the company. Since less risk is involved in FPO the return is less than investing in IPO.

Lastly, you will require a Demat account for direct investing in stocks. Or you can do mutual funds in which a Demat account is not required, if you don’t have time to active track the market and invest. In a mutual fund, the fund manager will take care of your money where to invest or not. Also, you cannot pick any stock IPO or FPO you must know how to analyze a company on different financial metrics.