What is an IPO?
IPO is the short form of an Initial Public Offer. It refers to the process through which a privately held company transforms into a public company. This is done by offering the company shares to the general public for the first time following which the company gets listed on the stock exchange. It is issued for infusing new equity capital into the company to facilitate the trading of pre-existing assets easily or monetize the existing stakeholders’ investments.
Before the IPO is issued, a company has a handful of shareholders including the founder, venture capitalists, and angel investors. However, during the IPO, the company shares are sold to the public and any investor can directly buy those shares and become a valid shareholder in the company. Though investments made in IPO are considered to be a smart move but before joining the bandwagon, you should know the benefits and risks associated with it. First, let us understand the basics of IPO.
Types of IPO
There are two main types of IPO. They are as follows:
- Fixed Price Offering: This IPO follows a straightforward approach. The issue price is set by the company beforehand for the sale of shares. This price is then made known to the public. The demand for these stocks can only be gauged after the closing of the issue. If you partake in this IPO, you have to ensure that you pay the full amount during the application.
- Book Building Offering: Under this IPO, the company offers the stock within a 20 percent bandwidth within which the investors can place their bids. Bids are made by the investors before the decision on the final price is made by the company. Under this bandwidth, the lower price is known as the floor price and the upper price is called the cap price. As an investor, you can bid for any number of shares and pay the price within the band. This IPO helps the company in testing the waters and investors’ interest before the declaration of the final price.
Other terms associated with IPO
To start investing in IPO, you need to be first aware of several basic terms that are used in this process. Let us discuss some of the common ones.
- Issuer: It refers to the company issuing shares to the public to fund its operations.
- Underwriter: An underwriter can be a merchant banker, financial institution, or individual broker. It refers to the commitment that they will be subscribing to any balance shares in case the offered IPO stocks are not picked by the public.
- Draft Red Herring Prospectus: Also known as the DRHP, it refers to the document through which the public is informed by the company about its IPO listings after getting the SEBI approval. It has important information like the purpose of raising the funds, promoter’s expenses, balance sheet, last three years’ earning statement, net company proceeds, underwriter commission and discounts, names and details of all the underwriters, legal opinion and all the other important information
In the End
IPOs are considered to be beneficial in most of the cases as it helps the company in increasing its exposure and equity base. However, before investing in the same, one should have a clear understanding of the financial metrics associated with the same. To gain a better insight into them, call our financial experts with your doubts and get them cleared right away.