What is an IPO?
IPO stands for the Initial Public Offering, when a private company offers it’s shares for public to the first time. It is company’s first sell of stock to the public or you can say it is the process of going public through an offering of securities by a corporation to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it’s known as an IPO.
Companies are of two broad categories: private and public.
A privately held company has fewer shareholders and its owners don’t have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of jurisdiction. Most of the small businesses are privately held and most of the large companies are public. There are many examples of large companies which are not public like IKEA, Domino’s Pizza and Hallmark Cards are all privately held.
An IPO is the 1st sale of a joint venture shares to the public. After taking out an IPO a private company becomes public company.
This is done with the help of a stockbroker firm(sometimes by several banks) which handles the distribution of shares to the public.If one has a private business and own all its shares, then he can take some of these shares and sell them to the general public to raise money.
Reasons behind offering an IPO:
The primary reason to offering an IPO is that companies plan to use the money gathered from IPO to further expand their business or
to increase their business operations. It is pretty tough to grow your company with just your own money or depend on debt. This is when companies think of taking out an IPO and raise money for expansion.
Taking out an IPO is the right time to cashing the success of a company and hyping the excess money to grow your company.
Why IPO’s are so popular:
IPO’s are so popular just because they are comprehended to make easy money for short term as well as long term investors.
Suppose a company decides to take out an IPO, and fixes the number of shares and price, at which the offer will be made to the public. Then investors starts applying for shares of this particular company, and normally most of the IPO’s of famous company’s receives more number of applications than the total. People are keen on getting shares because the price at which the IPO is offered is commonly perceived to be at a discount to the fair value and when this IPO is listed, stock zooms up on the day of listing and a lot of investors made money by selling on the same day itself and if it was beneficial for long term also.
Other reasons are:
- Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
- As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
- Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.
Risk on today’s scenario:
Till a few years back IPO’s were the surest way to earn money because company’s offer their shares at a discount to the public in an IPO and it was sure to jump on the very first day of listing it’s stock. But it is rare now a days to find an IPO with discounted rate, company’s are offering their shares at a decent price and it is just like a wild goose chase for the normal public to buy shares of an IPO.
I am giving you an example of India’s one of the biggest IPO ever, Mumbai-based Reliance Power who raised $3 billion in January 2008 by initial public offering.The 228 million shares Reliance Power offered on January 15 sold in less than a minute. The shares sold represented a 10% stake in the company, which aims to provide electricity to power the country’s fast growth but which so far doesn’t have a single operating power plant till now.
Remember: an IPO is just selling stock. It’s all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money.So in my opinion IPO’s are one more another option for making or loosing money in share market.
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Good basic coverage there about IPO. Just like to add few more points here:
Iissue price should not always be considered as discounted price. In fact, recently, most of the issue prices of public sector companies were far higher than than the book value. For example NHPC’s P/E ratio was close to 35 which is too high ask. Its important for an investor to do his own research first.
Secondly Investment banks or stock broker firms calculate the issue prices by their own method which may be influenced by promoter of the company too. So knowing real book value becomes important.
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