IPO Investing

IPOs (Initial Public Offerings)

What is an IPO?

An IPO is when a company which is presently not listed at any stock exchange makes either a fresh issue of shares or makes an offer for sale of its existing shares or both for the first time to the public. Through a public offering, the issuer makes an offer for new investors to enter its shareholding family.

The shares are made available to the investors at the price determined by the promoters of the company in consultation with its investment bankers.

The successful completion of an IPO leads to the listing and trading of the company’s shares at the designated stock exchanges.

Why does a company make an IPO?

Going public provides an opportunity to the companies to raise cash for setting up a project or for diversification/expansion or sometimes for working capital or even to retire debt or for potential acquisitions. This is called fresh issue of capital where the proceeds of the issue go to the company.

Companies also go public to provide a route for some of the existing shareholders including venture capitalists to exit fully or partially from the company’s shareholding or for promoters to partially dilute their holding. This is called an offer for sale where the proceeds of the issue go to the selling shareholders and not to the company.

Listing of IPO

Listing offers several benefits. For one, it increases the company’s ability to raise debt at finer rates. The company also gets a continuing window for raising more capital, both from the domestic and overseas equity markets. Acquisitions also become simpler as instead of cash payouts, companies can use shares as a currency.

Listing also lends liquidity to the stock, which is very critical for the success of employee stock ownership plans, which help to attract top talent. Of course, listing carries a considerable degree of prestige for the company.


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