What is Initial Public Offering

What is an IPO or Initial Public Offering

An initial public offering (IPO) is a process where first time the stock of private company is offered to the public in open market. A company can raise money or equity capital by issuing debt or equity. IPOs are often issued by new, smaller or younger companies seeking capital to expand, but this is done by large privately owned companies looking to become publicly traded. It is also called as public offering.

There are two companies that falls into IPO category i.e. Private and Public companies

A private company has fewer shareholders and its owners do not have the right to reveal much information about the company. Most of the small businesses are privately held but large companies can be private as well such as IKEA, Domino’s Pizza and Hallmark Cards are all private companies. Normally it is not possible to purchase the shares of private company but you can approach the owners for investing but they are not bound to sell you anything. Whereas, in public companies have sold at least a portion of themselves to the public and trade on a stock exchange.

Why IPO is needed?

  • Most of company go public to raise capital or to need money for expansion to grow the company.
  • For mergers and acquisitions, they require money to buy companies.
  • To market themselves, especially for the companies that are less-known to other, an IPO is a great option to increase its status and attract more investors, customers and partners.
  • For easy and greater access of capital in near future for the firms.
  • IPOs can help in growing companies to attract new talents by offering them plus side like stock options.

How IPO work?

Initial Public Offering as stated above, is the method where company first sells its stock to the public and becomes a publicly traded company. When a company decides to move forward with an IPO, to create prospectus, it must work with an underwriter that may be a typically a bank or multiple banks. A prospectus is a complete financial report designed to help investors to make well-versed decisions.  Than a date is set for the company’s IPO once the prospectus is filed with the Securities and Exchange. As the IPO date come near, the company must choose on a price at which stock is to be offered. The price can depend on several factors including the company’s performance as well as professed investor appetite for its stock.

The epic IPO was happened in US in Alibaba which is the e-commerce platform had filed for an initial public offering in the US, which achieved the largest market entrance in history. Alibaba had planned an initial range of $60 to $66 a share, however demand for the stock moves up the top estimate to $68, which is what the company is ultimately settled on. Six investment banks are leading Alibaba through the IPO process: Credit Suisse, Deutsche Back, Goldman Sachs, Morgan Stanley, Citi, and JPMorgan Chase.

Another IPO miracle that recently happened in India was that of D-Mart. A retail chain based out of Gujarat, D-Mart had a bumper listing on the BSE, making a lot of money for its investors as well as owners in a very short time. The stock reached almost 3 times of its price mentioned in the IPO. Statistically, that made a single store of D-Mart worth 3 Billion. This amount of money is sufficient to make a fully fledged shopping mall.

Similar to this, there have been many cases, where IPOs have made people richer in a quick span of time. The performance of IPO has created so much anticipation that a prediction is thriving over the performance of the IPOs.

Major drawback of IPO of going public is the time, money and expense of going through the entire process. Generally, an IPO take time anywhere from six to nine months or longer. Between this time duration, the company’s management team is probable to be focused on that IPO, which might cause other areas of the business to suffer. In addition, it will also costs money to go through with an IPO which includes financial service or underwriting fees to filing fees. Other drawbacks might include restrictions on management, loss of personal benefits and trading restrictions.

Necessary factors before applying for an IPO:

There are certain factors which are important to consider before applying for Initial Public Offerings in India:

  • Promoters consistency and past records
  • The products offered by the firm and their prospective of going forward
  • Past records of the company providing the Initial Public Offerings
  • Whether the company has partnership with technological firm
  • Various techniques of project for sponsoring the plan
  • Expected risk that might occur in the execution of the plan
  • Estimate the productivity of the project

There are two types of IPO issues that are:

1) Fixed Price Issue: The issuing company determines a fixed price for the issue at which its shares are offered to investors. Before the company goes public investors knows the share price.

2) Book Building Issue – The issuing company or company going public discovers its price on shares to investors using the book building process. Investors then bid on the shares before the final price is done once the bidding has closed. Investors need to state the number of shares they want to purchase and how much they are willing to pay. There is no fixed price per share. The lowest share price is known as the floor price and the highest share price is known as the cap price. The final share price is determined through investor bids.

To move forward with an IPO you must evaluate the benefits and drawbacks involved and get into an IPO for a good investment.

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