Introduction
How many times have you come across the term ‘IPO’ while browsing your newspaper or even in the news as such? If you have been wondering what all the fuss is about around and what the IPO meaning is, here is everything you need to know about the term.
Understanding IPOs
IPO or Initial Public Offering is a process that enables privately held companies to become publicly traded companies. This is done by offering the company shares to the public to invest in for the very first time.
There are a few reasons in particular as to why private companies decide to go public through the IPO process:
- Offering an IPO helps the company raise capital that can be utilized in improving and growing their business, developing their infrastructure, repaying loans, etc
- When company stocks are traded in the open market, it increases liquidity, enabling employee stock ownership and compensation plans, which further brings in more talented workers
- The announcement of an IPO also functions as a way for the company to flaunt the credibility it has built over the years.
Different Types of IPOs
Here’s a look at two IPO types:
- Fixed Price Offering
- The price of the IPO is fixed and announced in advance.
- Fixed Price Offering IPOs need to be paid in full, before the allotment of shares
- Book Building Offering
- These offerings do not have a fixed price but have a price band instead
- Investors bid for the number of shares they want to buy and the price they are willing to pay for them.
- At the end of the IPO, the final price for the shares is decided depending on these bids.
Impact on Investors
IPOs can prove to be both advantageous and disadvantageous for investors. Here’s a look at both sides of the coin:
The Benefits:
- Investors gain access to a growing company that potentially proves to be beneficial for them if the company continues to continue its growth trajectory.
- When companies go public, their shares become more liquid and marketable, enabling their shareholders to buy and sell the stocks in the stock market easily.
- Portfolio diversification is a brilliant way for investors to reduce risks in their investment portfolios. This is why, by including IPOs in their portfolio investors can expand their trading acumen to newer companies
- Buying shares as a part of an IPO will grant investors access to shares at a lower rate than the post-IPO market price.
The Drawbacks
- As much as IPOs can prove to be beneficial for investors, they are also highly susceptible to market volatility. This could lead to potential losses for any investor
- Lack of information regarding these newly public companies can be another hindrance for investors who are looking to make profitable investment decisions. Since private companies are not obligated to disclose their financial and operational details, going into an IPO could prove to be counterproductive.
- IPO shares usually come with a lock-in period that can prevent you from selling the IPO shares after listing. The lock-in period is a particular time frame set by the company. Only after its expiry can investors in the IPO sell the company stocks on the market.
Conclusion
An IPO can prove to be a great addition to any investor’s portfolio. However, it is extremely important to analyze every aspect of the company and the details it provides for the IPO to take the final plunge. This will help you steer clear of any potential losses and help you gain the knowledge you need to make an informed decision.
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