When you are going through news portals or reading your morning newspaper, I am sure you have heard of an IPO. Many of you might be wondering what an IPO is actually. To make it simple, have enumerated most of the concepts related to IPO in this blog. So come on, let’s dig in.
“Primary Market” and “Secondary Market” are represented by the capital market. The new issuers (primary market) and the stock market (secondary market) are the two interrelated and inseparable components of the capital market. The issuers can raise new funds from investors through the primary market by launching initial public offerings, rights issues, or offers to sell debt or stock
Due to the fact that investors in the primary market are guaranteed a steady market in which to liquidate their assets, an active secondary market encourages the expansion of the primary market and capital formation.
What is an IPO?
In a stock market, an Initial Public Offering is abbreviated as an IPO. Selling securities to the general public on the primary market is known as an initial public offering, or IPO. It is the company’s main source of long-term or extended-horizon funds.
In other words, the procedure by which private businesses sell their shares to the general public in order to generate equity capital from public investors is known as an initial public offering (IPO). An organization that is privately held becomes public through the IPO process. Through the IPO, the company gets its name listed on the stock exchange.
Investing in an IPO: What are the pros and cons of it?
|Gaining access to capital: A firm generates more money through public offerings than it does. The significant amount of cash on hand could significantly change a company’s direction for growth. After its initial public offering (IPO), a bold business could experience a new phase of financial security. This choice can benefit the R&D team, among other things by funding capital expenditures, hiring new staff, setting up facilities, paying off debt, and acquiring new technology.
Boosting liquidity: The liquidity and marketability of a company’s shares increase upon going public. Investors in the company will be able to purchase and sell equities on the stock market when it goes public.
Diversification: Including Initial Public Offerings (IPOs) in your portfolio enhances diversification (a vital risk management tactic). Through IPOs, investors can increase their holdings and diversify into new businesses. Diversification increases return possibilities while reducing the concentration risk connected with investing in a single business or industry.
|Volatility: Even though IPOs present possibilities to participate in innovative and expanding businesses, they can be risky since they are extremely volatile financial assets.
Scanty information: Investors in start-up businesses frequently have to work with incomplete information. Comparable levels of financial and operational disclosure are not required of privately held businesses as they are of publicly traded ones. It can be difficult for investors to fully assess the company’s long-term prospects, competitive environment, and fundamentals due to a lack of information.
Lock-in period: You might not be able to sell the IPO shares once they list due to the lock-in period. When certain shareholders, such as venture capitalists and corporate executives, are prohibited from selling their stakes, it is usually a cooling-off period. Due to an excess of shares on the market, investors may experience a drop in share price following the lock-in period, which can extend anywhere from a few months to a few years. Therefore, before making an investment in an IPO, it is crucial to carefully analyze the lock-in period and its potential impact on the share price.
Why do companies go public through an IPO?
- The purpose of an IPO is to generate revenue. Every firm needs money for a variety of reasons, including expansion, infrastructure improvements, business improvement, debt repayment, etc.
- Increased liquidity is a result of trading equities on the open market. It provides access to alternative compensation schemes and employee equity ownership programs, such as stock options, which draw top talent.
- A business going public indicates that it has achieved sufficient success for its name to be displayed on stock exchanges. For any organization, it is an issue of pride and credibility.
Fixed Price Offering and Book Building Offering
Companies offer two main forms of initial public offerings (IPOs), viz. Fixed Price Offering and Book Building Offering.
The term “fixed price initial public offering” (IPO) refers to the price that certain corporations set for the first selling of their shares. Investors learn the price of the stocks that the business chooses to release to the public. Following the issue’s resolution, the market’s demand for the stocks can be ascertained. Investors who wish to participate in this IPO must make sure that, at the time of application, they pay the full price of the shares.
When a business initiates an IPO, it provides investors with a 20% price band on the stocks in the case of book building. Before the ultimate price is set, interested parties place bids on the shares. Here, the investors must state the quantity of shares they plan to purchase as well as the price per share they are willing to pay. The term “floor price” refers to the lowest share price, while “cap price” refers to the highest stock price. The bids made by investors determine the final decision on the share price.
Things to know before applying for an IPO
1. If you invested in the company’s initial public offering (IPO), you are susceptible to its success or failure. You directly affect its gains and losses.
2. It is important to understand that an organization that makes its shares available to the general public is not obligated to pay back the money that was invested by the public.
3. Prior to making an IPO investment, you should evaluate your possible risks and rewards. Read up on an account from a wealth management company or an expert if you are a beginner. Consult your own financial advisor if you’re still unsure.
Investors have the freedom to choose whether or not to participate in an IPO, but doing so can highlight the investment’s earning potential. It can be difficult to choose the best initial public offering (IPO), but if you can pull it off, IPOs may end up being your most important investment.