What does an Initial Public Offering mean and why companies start to issue IPOs for their organization? By the end of this article, you will get an answer to the above-mentioned question and learn many more facts about IPO.
Initial Public Offering is something where a privately owned company starts to publicize themselves for the general public by issuing shares and getting themselves listed in the stock market. So, with this the general public gets an opportunity to buy the shares issued by the company and become a shareholder. Issuing IPOs is considered as a big move in the market because the company is becoming publicly available and they gain a huge rise in the share price as they make it into the news. But it is also a risky move because of the unpromised returns in the long term.
Initially when the company makes an announcement about IPO it gains huge attention resulting in making money but as the time passes and they are out of the trend the prices may decrease as the attention is shifted to somewhere new and the public tends to give less attention which may result in less returns. There is a lot of work that goes into when a company plans an IPO. Most importantly it has to meet the requirements of the Securities Exchange Board of India and has to submit all the required financial paperwork and disclosures.
When a company wants to go public it must hire an investment bank to set its prices for the IPO before getting itself listed on the Public Stock Exchange platforms. They only get listed after fixing the initial price and creating required documents for the investors. So, basically issuing the Initial Public Offering means a private company going public and making itself available for the public to invest.
After issuing the IPOs the shares are then allowed to trade freely in the market which is known as the free float. For the potential purchasers of the IPO there is a document which is known as the Prospectus which contains all the required details. And coming to fixing the prices the companies hire an investment bank which comes with an underwriter who helps assess the value of the shares and set the company for the market. The biggest advantage of an IPO for a company is that when it initially issues shares the money paid by the public for the shares directly goes to the company and also the private investors who want to sell off early.
IPO basically helps a company diversify its equity base and gain easy access to the capital required. It also creates an image for the company itself in the eyes of the public. But due to the IPO the company loses control over itself due to the new shareholders. There will also be increased accounting and marketing costs to the company.
There are two types of IPOs:
Primary IPO: This is the very first time where the company offers an IPO for the public to directly invest. It is the Stock Market Launch.
Secondary IPO: Here there is a sale between the investors. One investor buys from another who initially bought. It is difficult to get the Primary IPO so most of the businessmen depend on the Secondary IPOs and they are always high.
Few of the Biggest IPO Companies in the history:
- Facebook – Sold 421.2 million shares in a single day also that single day being the first days of trading.
- AT&T Wireless – This huge telecommunications company made a huge amount on the launch of its IPO.
- Bank of China – On its first day of IPO it was credited with $11.1 as its launch.
Before investing in an IPO it is very important for us to know more about the future prospects as they are risky at times. Sometimes there are chances for losses in the Secondary IPO so being careful saves. By looking into the company’s prospectus, you will understand their growth patterns which acts as the main determining factor for tracking progress and making future assumptions.
The kind of business the company is involved in also matters as the business must be a sustaining one in future only then the company will survive and hence the business. So, the trend of business also plays a key role. The past profits and losses of the company also helps in determining the future price fluctuations. Keeping the current trends in the stock markets can help you in investing.
Concluding this it would be reasonable to say that IPO (Initial Public Offering) helps the companies grow and expand themselves largely to the public and also encourages investors hence its great for both the investors and the companies issuing IPO.