Initial Public Offer
What is an IPO?
As name suggests initial so it is first time a company willing to offer its share to public i.e. ownership of the company.
An IPO is issued though exchanges. Public puts bids and once bids are being received then allotment is given to applicant based on pro rata basis. There may be other ways to allot share as per company norms and as acts allow.
To issue IPO companies must meet the requirement of the exchanges and Securities exchanges in case of INDIA SEBI (Securities exchange board of India).
Company hire investment banker to accomplish the full process of IPOs.
Why do companies offer IPO?
When a company has created a goodwill in the market and now want to extend its business to next level and needs funds for that so companies go for an IPO.
Though in an IPO companies have to share their ownership however they are remained from any liabilities towards the share purchaser provided there is no wrong practice in sight of laws. IPO allows companies to get investment at almost no future liabilities.
IPO are far better than taking a loan where they have to give huge interest since in companies generally amount is not small but big.
Why people invest in IPOs?
When public thinks that issuing company is good and has a good track record in the market. Companies is profitable in recent past and ready to grow its business. Investor find things lucrative and thinks that share price given by them is less and expected it to grow in future from the current level.
An investor also things that companies in future will provide dividend in future days.
Investor finds that there may be a good return in form of price appreciation of the stock price and also from dividend.
The main reasons companies choose to go public through an IPO are:
- Raising capital: Going public allows the company to raise funds from the public investors, which can be used for various purposes, such as expanding operations, funding research and development, paying off debts, or making acquisitions.
- Liquidity for existing shareholders: Prior to the IPO, the company’s ownership is usually concentrated among a small group of private investors, founders, and employees. Going public provides these existing shareholders with an opportunity to sell their shares and realize their investments.
- Public visibility and brand recognition: Being a publicly traded company increases the company’s exposure and reputation, potentially attracting more customers, partners, and opportunities.
- Employee incentives: Publicly traded companies often use their shares as part of employee compensation packages, which can be more attractive and motivating to employees than private company equity.
- Currency: Publicly traded companies have publicly valued shares, which can be used as currency for mergers and acquisitions, making it easier to execute deals.
However, the process of going public through an IPO is complex and involves significant regulatory compliance and scrutiny. Companies need to disclose extensive financial and operational information, and they often work with investment banks and other financial institutions to facilitate the offering. Additionally, going public means that the company will be subject to ongoing public reporting and compliance requirements, which can be demanding and costly.