What is an IPO?
An initial public offering (IPO) is the first time a company issues shares to the public. This is when a private company decides to go ‘public’.
In other words, a company that was privately-owned until then becomes a publicly-traded company.
Before the IPO, a company has very few shareholders. This includes the founders, angel investors and venture capitalists. But during an IPO, the company opens its shares for sale to the public. As an investor, you can buy shares directly from the company and become a shareholder.
As we know, when a company needs funds to grow, it approaches the public for funds. It offers shares in the company to the investing public in exchange for cash. In short, the management relinquishes some part of the ownerships to investors, who become part-owners of the company.
Before the IPO, a company has very few shareholders. This includes the founders, angel investors and venture capitalists. But during an IPO, the company opens its shares for sale to the public. As an investor, you can buy shares directly from the company and become a shareholder.
IPO shares are reserved for specific categories of investors like high net-worth individuals and qualified institutional buyers. After allotment, the investors are free to sell the shares and make any profit if there is price appreciation.
IPOs are not just for equity alone. Companies can issue IPOs for non-convertible debentures and bonds as well. These are other ways in which companies can raise money from the public without relinquishing any control of the ownership.’
From the pricing perspective, IPOs can be divided into two – fixed price issue and book built issue. In a fixed price issue, the company that is coming out with an IPO sets the IPOO price beforehand, and this is mentioned in the prospectus. In a book-built issue, no price is fixed previously. Instead, it is decided upon according to investors’ demand. Investors have to bid within a price band, and the difference between the floor and ceiling of the band should not be more than 20 percent.
Another concept you need to understand while opening an IPO account is the lock-in period. This is the period before which underwriters and company insiders are prohibited from selling shares in the secondary market. The timeframe ranges from a few days or a couple of years. Prices of the stock can fall sharply when insiders and underwriters sell the stock, so this is something you should keep in mind.
Why does a Company
go Public?
- To raise capital for growth and expansion
- Allowing owners and early investors to sell their stake to make money
