In this article, we will cover
- What is an IPO?
- How Does an IPO Work in the Share Market?
- Importance of an IPO
- Why Do Companies Go Public?
- Disadvantages of Going Public
- How Do Companies List in the Stock Market?
- Types of Initial Public Offerings
- Differences between Fixed Price Issue and Book Building Issue
How Does an IPO Work in the Share Market?Going public through an Initial Public Offering (IPO) is complicated and requires a lot of planning and compliance. A private company that wants to launch an IPO in the share market must be ready for more scrutiny from the public and follow the Securities and Exchange Board of India's rules (SEBI). A private company will hire an underwriter, usually an investment bank, to help them through this process. As a consultant, an underwriter helps the company set the initial price for the offering, prepares important documents for investors, and sets up "roadshows" with potential investors. This makes it easier and better for the company to handle the IPO process.Once the company and its underwriter have decided on an IPO price, the underwriter will give investors shares. The company's stock will start trading on a public stock exchange like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). This is the official start of the business as a public company. The underwriter is a key part of this process because they help the company set the initial price and gives investors shares, which lets the company's stock start trading on a public exchange.
Importance of an IPOAn initial public offering (IPO) is a big step in a company's growth because it lets the company raise money, gain credibility, and get more attention. One of the best things about an IPO in the share market is that it enables people to buy shares in the company and help it grow. The process of an IPO also ensures that prices are clear, allowing the public to figure out how much the company is worth and keep track of how it is doing.Follow-on Public Offerings are another way for companies already traded on the stock market to raise money (FPO). This is when a company that has already gone public through an IPO gives out more shares to the Public. This gives the company a chance to raise more money for various reasons and allows the Public to buy shares.
Why Do Companies Go Public?There are many reasons a company might go public or have its first public offering (IPO). Here are some of the most common ones:
Improves Financial Position
Liquidity for Private Equity Investors
Liquidity for Employees
Liquidity and Marketability
Mergers and Acquisition
Credibility and Branding
Disadvantages of Going PublicGoing public through an IPO in the share market can have many benefits, but it's important to remember that there may also be some problems. Here are some things that could go wrong with going public:
Huge Upfront Costs
Loss of Autonomous Control Over the Company
Increases Compliance Requirements
How Do Companies List in the Stock Market?To go public, a company must make an Initial Public Offering (IPO) and list its shares on a stock exchange. Companies must follow the rules set by the Securities and Exchange Board of India (SEBI), which is in charge of the market, before applying for an IPO. Once the IPO is approved, both individual and institutional investors can sign up for it on the stock market and buy shares in the company. It's important to remember that there are only so many shares to go around, and not all investors who sign up for the IPO will get shares. The process of giving out shares is done randomly to ensure it is fair and avoid favouring certain investors. After investors get their claims, the company's shares are put on the stock exchange so they can be bought and sold by anyone.
Types of Initial Public OfferingsInitial public Offerings (IPOs) are the first time a company sells shares to the Public. Both types of IPOs let a company sell shares to the Public to raise money and get more attention. A company that wants to go public on the stock market can do so through a Fixed Price Offering, a Book Building Offering, or both. There are two main kinds of IPOs:
Fixed Price Issue
Book Building Issue
Differences between Fixed Price Issue and Book Building IssueBoth offers have pros and cons, and companies will choose the best fit for their needs and goals.
|Price||In a Fixed Price Offering, the price of the shares is set on the first day of listing and is written in the prospectus. In a Book Building Offering, on the other hand, only a price range or band is set at first. The exact price won't be known until after the bidding process.|
|Demand||In a Fixed Price Offering, the demand for the shares isn't known until after the offering period is over. In a Book Building Offering, on the other hand, the demand for the shares is known every day as the book is built.|
|Payment||In a Fixed Price Offering, investors must pay the full price of the shares at the time of bidding. In a Book Building Offering, however, payment can be made after the shares have been given out.|
Benefits of Investing in IPOs for InvestorsInvesting in initial public offerings (IPOs) can give investors several benefits, such as:
- Ideal entry point: IPOs can give investors a lot of money back when the market increases. IPOs are a good way for investors to get quick and profitable returns on short-term investments or to get more money to invest in other things.
- Early advantage: Strong companies usually start trading at a premium, and their stock prices go on to be higher than their IPO price. Investors can get a head start when investing in an IPO because other people can't buy the stocks at the IPO price.