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What is an IPO (Initial Public Offering)?

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IPO Initial Public Offering

Whenever, a company offers its shares on a stock exchange for the first time or sale of its stock for the first time, it’s called issuing an IPO. A company can raise money either through debt or equity, so a company raising money by issuing equity for first time is known as IPO.

There are two types of companies namely private and public. Private companies have fewer shareholders and investing money in those requires approaching them. However, public company on the other hand sells a portion of themselves to public by issuing shares, so there are a number of shareholders.

Benefits of Going Public

It is also termed as going public as a private company turns into a public company. The reasons could be many for a company going public, one of them being its expansion into the market. After an IPO, the shares can be freely traded into the market between different investors providing liquidity.

Disadvantage of Initial Public Offering (IPO)

The major disadvantage of an IPO is the cost associated with it. Issuing an IPO is a rigorous process that involves issuing a prospectus which contains information about the company, no of shares and price of shares to be issued.

Generally, a company seeks the help of an underwriter (an investment banking firm) for correctly assessing value of share price.

For example

The face value of a share is Rs 10 but it can be issued at Rs 9 (discounted price) or Rs 12 (premium price) depending upon willingness of investors to pay.

Underwriters also help to establish a market for sale of shares. They also underwrite shares that in case shares are not purchased by the public, then they would purchase it.

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Komal Shahani is a professional Investment Banker. She graduated in Commerce from Rajasthan University. Komal is a voracious reader and passionate writer.

3 COMMENTS

  1. IPOs have a history behind them.On one hand, IPO helps gain a company it’s strength from investors and on the other hand IPO assists in establishing the reputation of a company too.Going public in many ways assures investors that the company is trustworthy and they can invest.Well-written!

  2. I remember seeing this on a lot of movies – the bit where a company gets to go and press a big button and announce that their company is going public and people can buy shares and be a part of something big. 🙂

    IPO is one of the most exciting times for companies. It’s cause for a huge celebration because it provides a lot of income profits for both company and for those who want to invest.

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