IPO stands for Initial Public Offering, which is the first sale of the stock by a private or any government company that opens to the general public. The company which comes with an IPO can be new, a budding company or an old company which decides to be listed on an exchange and therefore, goes public.
In an IPO the company can raise equity capital by issuing new shares to the public or to its existing shareholders without the need of raising any fresh capital.
Overall, going public is a complex decision that requires careful consideration and planning; though there always remains a threat of public company’s loss of confidentiality, flexibility, and control etc but if one chooses the right procedure, an IPO is bound to turn out a success in short as well as long run, for the issuer company.
A company offering an IPO i.e “the issuer” is not obliged to repay the capital to its investors. The issuer of the IPO is assisted by an underwriter or investment banker.
After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.
Any company “goes public” once they come out with an IPO gets listed in the stock exchange (in India it will be NSE, BSE & other regional stock exchanges).
How an IPO works?
The proceeds from the sale of shares/stocks during the IPO, provides the issuing company with capital & fund growth. The amount of cost and time involved in its process is immense.
The whole process of issuing the first capital to public is carried by an underwriter which aids the issuing company by soliciting potential investors to settle on the price at which the stock should be offered to investors.
Following the IPO, shares trade between buyers and sellers on the open market, whereby the underlying company receives no compensation.
Advantages of going public with an IPO:
- It helps in raising a lot of cash, thus opening many financial avenues and access to risk capital.
- It increases scrutiny which in a way gets the company better rates while they issue debts.
- It helps the issuer company to gain popularity & hence attract top talents of the nation.
- Capital raised during an IPO can be used to fund R&D, fund its capital expenditure or else can be used to pay off existing debt.
The formation of a public market for the company’s shares at fair price helps in creating liquidity.
- It enables in sharing of corporate controls, responsibilities etc.
Thus, to conclude IPO which is also termed as ‘stock market launch’ is public offering of company’s stock for the first time. The issuer company selling shares is never required to repay the capital to public investors. IPOs are out generally to raise the capital for expansion, to monetize investments, and to become publicly traded enterprise.