What is an IPO? Advantages and Disadvantages of an IPO
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Definition of IPO
An Initial Public Offering (IPO) is the first time that the stock of a private company is offered to the public to purchase. IPO’s are often issued by smaller companies seeking more capital, but they can also be done by large private firms looking to be publically traded. IPO’s are also possibly done to monetize the investments of early private investors. The process of an IPO is generally known as “Going Public”
In an IPO the issuing company takes the help of an Underwriting firm to determine the following:
- What type of security to issue
- The best offering price
- The number of shares to be issued
- The correct time to bring it to the market
Advantages of an IPO
- The company has cheaper access to Capital
- Increase in the prestige and public image of the company due to high exposure
- Helps attract better management and employees through liquid equity
- Increasing and diversifying the equity base.
- Creating different financing opportunities: equity, cheaper bank loans, convertible debt
Disadvantages of an IPO
- Significant account, marketing and legal costs to be incurred
- Disclosure of discreet financial and business information which can be useful for competitors, suppliers and customers
- Loss of control
- A lot of time, effort and attention needs to be given to the management
- Risk of not meeting the target of required funding