Initial Public Offer or more commonly known as an IPO is a method to convert a private company by making it go public. This is enabled by allowing the general public to invest in its shares, which in turn brings capital to the business. The age of the company, whether young or old, doesn’t matter. Once it decides to be listed on an exchange, it goes public. When it allows the public to invest, it means that ownership of the stock can change hands via trading on a stock exchange.
IPOs help companies raise equity capital by issuing new shares to the public. The general public can also buy from willing shareholders who already have a holding into the company stocks.
How does IPO process commence?
Before a company becomes public, it gets in touch with an investment bank to manage the nitty-gritties of the IPO. This investment bank and the company then work out the financial details and build a well-crafted underwriting agreement. Companies may opt to get the filing done with SEBI (Securities and Exchange Board of India) in parallel. Once all formalities are completed to the regulatory bodies’ satisfaction, an announcement is made about the date when the IPO will be launched. This enables the public to be notified and encourage in participation of shareholding for the company.
Now that you have understood how an IPO works, the next question that may follow is, why would a company offer an IPO?
There are various reasons why a company would make an IPO but the most important ones of them include:
- An IPO is generally done to raise capital (either for working capital or for long term capital). The funds raised via IPO can be utilised to expand or enhance operations, to improve the existing infrastructure or to bring down liabilities associated with the company.
- Liquidity is increased when shares are traded publicly during and post an IPO. It is considered one of the best ways to own a piece of action by traditional investors who don’t want to get too aggressive with equity trading.
- There is another reason why a company would decide to go from private to public. Doing so boosts the credibility of a company and helps you promote the company’s reputation the right way.
What’s in it for an investor?
It is always a tricky thing to invest in a new IPO. In the absence of a past historical performance, gauging the efficacy of stock trading for a new company is risky. An investor needs to read the prospectus to know about its finances. A company with a good set of brokers backing the IPO can be termed as a good buy. It will be wise to wait for the lock-in period to end even when the market is bearish and is not performing as per expectations. It is advisable to be cautious and then approach the market rather than go in blindly.
With these tips, you can extract the maximum benefits out of your investment into a new company by way of an IPO.