What is an Initial Public Offering(IPO)?
An Initial Public Offering (IPO) is a stock launching method to the public. When a private company launches its shares in the stock market for selling to retail investors or institutional investors, it is known as an IPO. From the IPO process, a company can earn a healthy amount of capital. The company can use that capital for business extension purposes or for funding to launch a new product. Many IPOs of big companies are on cue for launching in the stock market this year. It is an opportune moment for stockholders to invest in upcoming IPOs.
Why do companies go public?
Usually, a company goes public intending to raise funds and have growth, clear off its debts, research and development work, etc. Though it is the company’s own decision to stay private or go public, many companies opt to go public because they see some benefits in this process. Here are some factors that motivate companies to go for an IPO.
Going public through an initial public offering (IPO) refers to a conversion process of a private entity to a publicly traded and owned entity. Most companies issue IPOs to raise capital to expand their businesses or write off debts. However, an IPO can be a way of getting out of investment in the company. Make sure you go through the red herring prospectus and research the companies before investing in their IPO. In the stock market, numerous companies apply for initial public offerings every year.
Various companies are lined up for initial public offerings (IPO) with the economic recovery.
1. For Raising funds
A company can increase its capital by using the method for raising funds. The company can apply for bank loans also in case of fund requirements. But, banks are bound to pass the loan with certain limitations such as high-interest rates and limited funds based on the analysis of the applicant company. On the other hand, IPOs provide a platform for companies to raise lump-sum amounts. If a company succeeds in collecting more funds, the possibility of its growth increases.
2. For Brand Awareness
Most of the time investors are not aware of the brand name. The Listing gives recognition and investors’ attention to the company. It creates an image for the company and investors start tracking the fundamental and technical aspects of the company. IPO increases the goodwill and visibility of the company. A stockholder can buy upcoming IPO shares by using his Demat account and trading account.
3. Liquidity of shares
In private companies, a few stockholders contribute capital. There is a considerable growth in the number of stockholders when a company decides to go public. This is the indicator of company growth. Consequently, stockholders start earning profit in the form of dividends. A company can create a good image in front of inventors when it is a profit-earning company and declares a dividend to its investors. Also, shares of such companies trade in the stock market with high volumes and liquidity. Initial public offering increases the liquidity of shares.
4. Stakeholder’s trust
If a company plans to launch an IPO, it has to fulfil some requirements for eligibility as per the Securities and Exchange Board of India(SEBI). Investors are also assured that the company has complied with the SEBI guidelines and hence it is a strong company. It improves the credibility of the company. An investor wants to invest in companies whose goodwill and credibility are in the stock market. He can buy/sell shares of those companies through Demat and trading accounts.
5. Possibility of Acquisition
A company can go for an IPO to arrange funds when it is planning to acquire some other company. Companies acquire other small companies of the same industry with the objective of growth. After collecting funds through IPO, it can take over the other company and increase profitability.
6. Price Transparency
An IPO process helps increase the liquidity of shares. A company stabilises its financial condition by deciding to go for an IPO. After listing, it sells company shares in the market. Thus through an IPO, a company can increase price transparency and liquidity for stockholders who have been with the company for a long time.
7. Value Assessment
Value assessment is indispensable for any company. It is helpful for future growth. Once a company goes public, its value is assessed on the basis of what an investor is ready to pay for it. In this way, an outsider may also know the market value and growth potential of the company.
Launching an IPO is not an easy task for companies. It involves various stages such as selection of investment bankers, creating awareness among investors, pricing of shares, getting approval from SEBI, and finally, listing. A company can collect a good amount through IPO and an investor can also earn a good profit by investing in IPOs.
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