The process through which a private business can go public by selling its stock to the general public is known as an initial public offering (IPO). It can be a new, young firm or an established corporation which decides to get listed on the stock exchange and hence goes public. Companies can use an IPO to raise equity capital by issuing new shares to the public, or existing owners can sell their shares to the public without creating a new fund.
A firm that sells its stock to the public is not obligated to return the cash invested by the public. The ‘issuer’ or firm selling the shares does so with the help of investment banks. After the IPO, the shares of the company are traded in the open market. Investors can sell such shares for profit in the secondary market.
All about IPO
- A corporation is considered private before it becomes public. The firm has expanded with a limited number of shareholders, including early investors such as founders, family and friends, as well as business investors such as venture capitalists and angel investors.
- This stage of growth typically occurs when a firm has achieved a private valuation of $1 billion or more, commonly known as unicorn status. However, based on market competition and their ability to meet listing standards, private companies with good fundamentals and demonstrated profitability potential may potentially be eligible for an IPO.
- An IPO is an important milestone for a company as it allows it to raise a large amount of money. This increases the company’s ability to grow and grow. The increased openness and legitimacy of its stock listing can also help the company secure better terms when seeking borrowed capital.
- Underwriting due diligence is used to determine the price of initial public offering (IPO) shares of a company. When a company goes public, the previously held private share ownership is converted to public ownership, and the existing private shareholders’ shares are worth the public sale price.
- Share underwriting may also include special arrangements from private to public share ownership. In general, the transition from private to public is a critical time for private investors to capitalize on and realize their projected earnings. Private owners can retain their shares in the public market or sell part or all of them profitably.
- Meanwhile, the public market offers millions of investors the opportunity to buy shares in a company and contribute cash to a business’s shareholders’ equity. A member of the public is any individual or institutional investor who wishes to invest in the company.
- The equity value of the company’s new owners is determined by the number of shares sold and the price at which they are sold. Shareholders’ equity still represents shares owned by investors while it is both private and public, but with an IPO, shareholders’ equity increases significantly with cash from the initial issuance.
Important Points of IPO
- The process of issuing shares of a private firm to the public in a new stock issue is known as Initial Public Offering (IPO).
- To make an initial public offering, companies must meet exchanges and Securities and Exchange Commission (SEC) (IPO) standards.
- Initial public offerings (IPOs) allow firms to raise funds by selling shares in the primary market.
- Investment banks are hired by companies to market, evaluate demand, determine the price and date of an IPO, and other tasks.
- An initial public offering (IPO) can be viewed as a way for company founders and early investors to profit solely from their private investments.
Eligibility to apply for an IPO
An IPO can be applied for by any adult who is legally able to enter into a contract. To invest in an IPO, you will need a demat account as all the allotments are currently done only in demat form.
Whether a trading account is required to invest in IPO?
To apply for an IPO, in principle you do not need a trading account. By itself, a demat account (full form: dematerialized account) would suffice. However, if you want to sell the shares after they are listed, you will need a trading account. If you wish to apply for the IPO online, you can use your online trading account to log in to your application.
Advantages of IPO
The opportunity to reach out to a large number of investors and get instant funding is the major advantage of going public through an IPO. The funds can then be used to grow the firm, whether through research, infrastructure or development. In addition, by issuing shares, new, lesser-known businesses can gain exposure and expand their business potential. It’s also worth considering the reputation of being listed on a major stock exchange, which is a driving force behind some IPOs. Lastly, IPOs can help businesses expand by attracting new personnel by providing benefits such as stock options.
Disadvantages of IPO
One of the most significant drawbacks of going public through an IPO is the time and money required to complete the process. The initial public offering (IPO) may take six to nine months or more. During this time, the company’s management team will be primarily focused on the IPO, which could negatively impact other areas of the business. In addition, an IPO costs money, from financial service and underwriting fees to filing expenses. In addition, once a business goes public, it is subject to a number of new reporting and transparency obligations, all of which come at a cost.
A corporation has to answer to its shareholders after it goes public. When shareholders control a large portion of a firm, they have the option of voting to nullify management decisions or remove managers and directors altogether. Because public companies are sometimes pressured to perform well for their shareholders, they can make poor business decisions, sacrificing long-term growth for short-term rewards.
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