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What is IPO?

An Initial Public Offering (IPO) is the process in which a private company can go public by selling its stocks to general public. Know what is IPO, types, terms associated with IPO, Eligibility norms and more.

What is IPO?

Initial Public Offering (IPO) refers to the process where private companies sell their shares to the public to raise equity capital from the public investors. The process of IPO transforms a privately-held company into a public company. This process also creates an opportunity for smart investors to earn a handsome return on their investments.

Investing in IPOs can be a smart move if you are an informed investor. But not every new IPO is a great opportunity. Benefits and risks go hand-in-hand. Before you join the bandwagon, it is important to understand the basics.

What is IPO in Stock Market?

IPO stands for Initial Public Offering. Initial Public Offering (IPO) can be defined as the process in which a private company or corporation can become public by selling a portion of its stake to the investors.

An IPO is generally initiated to infuse the new equity capital to the firm, to facilitate easy trading of the existing assets, to raise capital for the future or to monetize the investments made by existing stakeholders.

The institutional investors, high net worth individuals (HNIs) and the public can access the details of the first sale of shares in the prospectus. The prospectus is a lengthy document that lists the details of the proposed offerings.

Once the IPO is done, the shares of the firm are listed and can be traded freely in the open market. The stock exchange imposes a minimum free float on the shares both in absolute terms and as a ratio of the total share capital.

Types of IPO

There are two common types of IPO. They are-

1) 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. The investors come to know about the price of the stocks that the company decides to make public.

The demand for the stocks in the market can be known once the issue is closed. If the investors partake in this IPO, they must ensure that they pay the full price of the shares when making the application.

2) 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. Interested investors bid on the shares before the final price is decided. Here, the investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share.

The lowest share price is referred to as floor price and the highest stock price is known as cap price. The ultimate decision regarding the price of the shares is determined by investors’ bids.

IPO Advantages and Disadvantages

Investing in IPOs comes with both merits and demerits. Here are a few of the benefits and drawbacks you must know before making your investment decision.

Benefits of Investing in an IPO

Investing in an initial public offering withholds the below-mentioned advantages-

Increased Recognition

When weighing the advantages and cons of an IPO, this good factor comes out on top. It assists management in gaining more reputation and credibility by becoming a trustworthy organization.

Companies that are publicly traded are typically more well-known than their private competitors. In addition, a successful process attracts media attention in the financial sector.

Access to Capital

A corporation may never receive more capital than it raises by going public. A company's growth trajectory might be substantially altered by the substantial cash available. An ambitious company may enter a new period of financial stability following its IPO.

This decision can help R&D, hire new employees, establish facilities, pay off debt, finance capital expenditures, and purchase new technologies, among other things.

Diversification Opportunity

When a corporation becomes public, its shares are traded on an exchange amongst investors. This increases investor diversity because no single investor owns a majority of the company's outstanding stock. As a result, purchasing stock in a publicly listed company can help diversify investment portfolios.

Management Discipline

Going public encourages managers to prioritize profitability over other objectives, such as growth or expansion. It also makes contact with shareholders easier because they can't hide their issues.

Third-Party Perspective

When a company goes public, it gains an independent perspective on its business model, marketing strategy, and other factors that could hinder it from becoming profitable.

Disadvantages of Investing in IPO

There are a few factors an investor would have to consider before starting to invest in an IPO-

More Costs

IPOs can be quite costly. Aside from the continuous costs of regulatory compliance for public firms, the IPO transaction process necessitates the investment of capital in an underwriter, an investment bank, and an advertiser to ensure that everything runs well.

Lesser Autonomy

Public companies are led by a board of directors, which reports directly to shareholders rather than the CEO or president. Even if the board delegated authority to a management team to oversee day-to-day business operations, the board retains the final say and the authority to fire CEOs, including those who founded the company.

সূত্র : groww.in

What is IPO, IPO Definition, IPO News, How to invest in IPO

Learn what is IPO, IPO definition, IPO news and more here at Business Standard.

WHAT IS IPO

IPO

An unlisted company (A company which is not listed on the stock exchange) announces 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.

The company which issues shares to the public is referred to as the issuer. There are two common types of IPO.

Read More..

IPO NEWS

Indian jeweller Joyalukkas drops public listing plan, withdraws $278 mn IPO

Joyalukkas, which focuses mainly on Southern India, is the latest to delay or pull its IPO plans amid market volatility and ...| February 21, 2023, Tuesday

China eases overseas listing rules, paving way for IPO rebound

The CSRC reiterated that Chinese companies seeking to sell shares abroad would have to register with the regulator after a ...| February 17, 2023, Friday

Sebi introduces issue summary document for filing IPO papers in XBRL format

Sebi on Wednesday introduced the issue summary document for filing papers pertaining to IPO and for further issue of securities ...| February 15, 2023, Wednesday

IPO-bound Swiggy names Delhivery chief, two others as independent directors

New appointments will strengthening governance, says food delivery platform| February 06, 2023, Monday

Little rain in the IPO desert: First dry spell since July 2022, shows data

Not a single penny got raised from initial public offerings and follow-on public offers (FPO) last month| February 06, 2023, Monday

Dubious distinction: AEL first to cancel share sale after full subscription

As per data provided by Prime Database, these 29 companies were targeting to raise a cumulative of Rs 11,000 crore| February 02, 2023, Thursday

FirstMeridian files new draft papers for IPO; cuts issue size to Rs 740 cr

Staffing firm FirstMeridian Business Services Ltd has refiled preliminary papers with capital markets regulator Sebi and reduced ...| January 30, 2023, Monday

Ankit Nagori-led Curefoods aims to expand cloud kitchens across India

Curefoods is expecting to reach annual recurring revenue (ARR) of Rs 1000 crore ($122 million) by the end of this year and it ...| January 29, 2023, Sunday

PE/VC investments dip 29% YoY to $54.2 bn in 2022 amid funding woes

Despite this decline, 2022 marks the second-best year for PE/VC investments in India to date; dip largely due to smaller deal ...| January 27, 2023, Friday

By March, we'll be closer to pre-Covid levels: ESAF Small Finance Bank MD

Thomas says the bank expects to bring the microfinance portfolio down to 60 per cent of its book| January 25, 2023, Wednesday

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সূত্র : www.business-standard.com

Initial Public Offering (IPO): What It Is and How It Works

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.

Initial Public Offering (IPO): What It Is and How It Works

By JASON FERNANDO Updated November 03, 2022

Reviewed by JULIUS MANSA

Fact checked by SUZANNE KVILHAUG

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Investopedia / Zoe Hansen

What Is an Initial Public Offering (IPO)?

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity 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.

KEY TAKEAWAYS

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.

Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an IPO.

IPOs provide companies with an opportunity to obtain capital by offering shares through the primary market.

Companies hire investment banks to market, gauge demand, set the IPO price and date, and more.

An IPO can be seen as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment.

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Initial Public Offering (IPO) Explained

How an Initial Public Offering (IPO) Works

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.

When a company reaches a stage in its growth process where it believes it is mature enough for the rigors of SEC regulations along with the benefits and responsibilities to public shareholders, it will begin to advertise its interest in going public.

Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as unicorn status. However, private companies at various valuations with strong fundamentals and proven profitability potential can also qualify for an IPO, depending on the market competition and their ability to meet listing requirements.

IPO shares of a company are priced through underwriting due diligence. When a company goes public, the previously owned private share ownership converts to public ownership, and the existing private shareholders’ shares become worth the public trading price. Share underwriting can also include special provisions for private to public share ownership.

Generally, the transition from private to public is a key time for private investors to cash in and earn the returns they were expecting. Private shareholders may hold onto their shares in the public market or sell a portion or all of them for gains.

Meanwhile, the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to a company’s shareholders' equity. The public consists of any individual or institutional investor who is interested in investing in the company.

Overall, the number of shares the company sells and the price for which shares sell are the generating factors for the company’s new shareholders' equity value. Shareholders' equity still represents shares owned by investors when it is both private and public, but with an IPO, the shareholders' equity increases significantly with cash from the primary issuance.

History of IPOs

The term initial public offering (IPO) has been a buzzword on Wall Street and among investors for decades. The Dutch are credited with conducting the first modern IPO by offering shares of the Dutch East India Company to the general public.

Since then, IPOs have been used as a way for companies to raise capital from public investors through the issuance of public share ownership.

Through the years, IPOs have been known for uptrends and downtrends in issuance. Individual sectors also experience uptrends and downtrends in issuance due to innovation and various other economic factors. Tech IPOs multiplied at the height of the dotcom boom as startups without revenues rushed to list themselves on the stock market.

The 2008 financial crisis resulted in a year with the least number of IPOs. After the recession following the 2008 financial crisis, IPOs ground to a halt, and for some years after, new listings were rare. More recently, much of the IPO buzz has moved to a focus on so-called unicorns—startup companies that have reached private valuations of more than $1 billion. Investors and the media heavily speculate on these companies and their decision to go public via an IPO or stay private.

What Is the IPO Process?

The IPO process essentially consists of two parts. The first is the pre-marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a public statement to generate interest.

সূত্র : www.investopedia.com