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An initial Public Offering, often known as an IPO, is the first time that a privately held firm has sold its shares to the general public. Initial public offerings (IPOs) enable businesses to secure funding from private investors in the form of equity. The transition from a private to a public company is typically accompanied by a share premium, making it a favorable opportunity for private investors to realize profits. All members of the general public are welcome to participate in the offering.
How Does An IPO Work?
- An underwriter, usually an investment bank, is hired by a private company going public.
- Underwriters prepare management for an IPO by creating investor documents and scheduling roadshows.
- The underwriter forms a syndicate of investment banking firms to distribute the new IPO shares.
- Each firm distributes a portion of the shares.
- After the company and its advisors set the IPO price, the underwriter issues share to investors and the stock begins trading on a stock exchange.
Terms Associated with IPO?
To understand IPO, one must know some basic terms. Some of the commonly used terms are: –
Fixed Price Ipo & Price Band
Fixed-price IPO is the price some companies set for the initial sale of their shares. A price band is a value-setting method in which a seller sets an upper and lower cost limit for bidders. Price range guides buyers.
Book Building
Underwriters and merchant bankers use book building to determine the IPO price. Underwriter makes a book with institutional investors' and fund managers' bids for shares and price.
Underwriter
An underwriter can be a banker, FI, merchant banker, or broker. It helps the company underwrite its stocks. The underwriter promises to buy any unsold IPO shares.
Issuer
An issuer is a company that wants to sell shares on the secondary market to finance its operations.
Benefits Of IPO
When a company goes public, investors can sell stock. This lets investors profit without repurchases. Increases investor liquidity since shares can be bought or sold anytime.
Brands are built on trust. By making a product or service public, you build consumer confidence in your brand. This boosts sales and profits.
Going public encourages managers to pursue profits over growth or expansion. It helps shareholders communicate because they can’t hide problems.
Going public helps the company raise money. SEBI allows a company to raise 20% of its capital via IPO. This helps businesses grow and expand.
Comparison Of IPO with Other Products
| BASIS | NFO | IPO |
| Defination | New fund offering (NFO). Asset Management Company launches a new fund. | IPO means new stocks. Companies issue these when listing for the first time. |
| Valuation | NFO invests the complete fund as units. | Performance drives IPO valuation. This is measured using P/E and P/V ratios. |
| Price | NFOs cost Rs. 10 each. NAV is based on market conditions, so this value is insignificant. | The valuation of IPO shares depends on company fundamentals and demand. |
| Usage Of Funds | NFO raises funds to invest in bonds and securities to profit from a lucrative theme. | IPO funds are used for expansion, debt repayment, and promoter stake reduction. |
| Listing | NFO invests funds based on NAV. This can be above or below the face value. | IPOs must be listed at or above a predetermined price range. If the price rises on the listing day, investors can gain substantially. |
| Risk | NFOs are for moderate-to-low-risk investors. | IPOs pose stock market risk. |
| Investors | No categorization. | IPOs are ideal for retail, institutional, HNI investors, etc. |