Explained: What is an IPO?
An IPO offers investors an opportunity to invest in the company and potentially benefit from its future growth and profitability.
An IPO stands for Initial Public Offering. An IPO is the process where an unlisted company sells new or existing securities to the public for the first time. This process turns a private company into a public company by selling a portion of its stake to investors. After an IPO, the issuing company becomes publicly listed on a recognized stock exchange, also known as 'going public'. The shares of the firm are listed and traded freely in the open market, with the business being owned by a large number of shareholders, potentially tens of thousands.
Why does a company decide to go public?
There are many reasons behind a company's decision to go public. Here are some benefits that a private company may get by launching an IPO.
Liquidity
A company's public offering provides liquidity for shareholders, enabling them to cash in on their company's wealth as the company grows. The public offer creates a market for the company's shares that gives investors the ability to sell their holdings.
Boosts market visibility
An IPO raises a company's profile among the general public. People who invest in the stock market but have never heard of the company begin learning about it and analysing its financials. This aids in its exposure to the market.
Enhances the credibility
India's capital markets regulator has set strict guidelines for firms to go public. This ensures superior management, regular financial data publication, and increased company reputation. The regulator also requires regular publication of financial data. A company's reputation often increases after becoming public.
Organic growth
A possibility for companies is to expand the business organically. Companies do this by increasing their infrastructure, expanding globally, and recruiting more engineers. This enables them naturally grow their network while also allowing restless investors to see part of their money going toward useful resources.
Valuation
When a company becomes public, its shares have a market value. As a result, it offers information on the company's market value. Good personnel and better choices for mergers and acquisitions might be attracted to a company with a high market value.
Diversification
The IPO funds can also be used to invest in similar companies, which will strengthen the primary business. Diversification is a typical goal for many businesses, and they frequently use IPO funds for it.
Raising capital
Raising capital is crucial for a company's growth, innovation, expansion, and risk-taking. Private companies initially support their operations through private funds. As the company grows, it may need a significant infusion of capital to expand, scale up operations, or pay debt. Owners must ask existing shareholders for additional funds, but they may be unwilling or unable to provide more.
Other options include banks, which may have a limited amount of funds based on the company's analysis, and going public, which requires companies to disclose their financial information before launching an IPO. Market regulators mandate companies to disclose their complete financial information, allowing investors to analyse their performance before investing in them.
This is the first part of our IPO series. Part 2 on the topic will be published soon.