An Initial Public Offer (IPO) is the first sale of shares to the public by a privately owned company. The companies going public raises funds through Initial Public Offer for working capital, debt repayment, acquisitions, and a host of other uses.
The investor/persons can apply for IPO Stocks in India by filling an online IPO application offered by the stockbrokers and banks. Brokers offer UPI-based online IPO applications and the banks offer both UPI as well as ASBA IPO applications.
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.
Advantages and Disadvantages of an IPO
The primary objective of an IPO is to raise capital for a business. It can also come with other advantages, but also disadvantages.
Advantages
One of the key advantages is that the company gets access to investment from the entire investing public to raise capital. This facilitates easier acquisition deals (share conversions) and increases the company’s exposure, prestige, and public image, which can help the company’s sales and profits.
Disadvantages
Companies may confront several disadvantages to going public and potentially choose alternative strategies. Some of the major disadvantages include the fact that IPOs are expensive, and the costs of maintaining a public company are ongoing and usually unrelated to the other costs of doing business.
Fluctuations in a company’s share price can be a distraction for management which may be compensated and evaluated based on stock performance rather than real financial results. As well, the company becomes required to disclose financial, accounting, tax, and other business information. During these disclosures, it may have to publicly reveal secrets and business methods that could help competitors.
Pros
- 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
Cons
- Significant legal, accounting, and marketing costs arise, many of which are ongoing
- Increased time, effort, and attention required of management for reporting
- There is a loss of control and stronger agency problems
FAQ’s
What Is the Purpose of an Initial Public Offering (IPO)?
An IPO is essentially a fundraising method used by large companies, in which the company sells its shares to the public for the first time. Following an IPO, the company’s shares are traded on a stock exchange. Some of the main motivations for undertaking an IPO include: raising capital from the sale of the shares, providing liquidity to company founders and early investors, and taking advantage of a higher valuation.
Can Anybody Invest in an IPO?
Oftentimes, there will be more demand than supply for a new IPO. For this reason, there is no guarantee that all investors interested in an IPO will be able to purchase shares. Those interested in participating in an IPO may be able to do so through their brokerage firm, although access to an IPO can sometimes be limited to a firm’s larger clients. Another option is to invest through a mutual fund or another investment vehicle that focuses on IPOs.
Is it Good to Buy IPO Shares?
IPOs tend to garner a lot of media attention, some of which is deliberately cultivated by the company going public. Generally speaking, IPOs are popular among investors because they tend to produce volatile price movements on the day of the IPO and shortly thereafter. This can occasionally produce large gains, although it can also produce large losses. Ultimately, investors should judge each IPO according to the prospectus of the company going public, as well as their financial circumstances and risk tolerance.