What is Initial Public Offering (IPO), Types and benefits

What is an Initial Public Offering (IPO) ?

IPO stands for Initial Public Offering. As the name suggest It is a process of transforming a private held company into a public company.

The stock in this process is offer for sale to the general public by the company seeking to raise capital for expansion.

Companies come out with public issue wherein they invite public to contribute towards the equity and issue shares to meet their fund requirements by sharing ownership with investors.

When one buys shares in the company ,he/she become shareholder and owner in the company by the size of share.

What are the types of IPO?

There are commonly two types of IPO.

Fixed price offering.

Fixed price IPO referred to as the price that some company set for the initial sale of their shares.

Basically, this is the price of stocks that the company decides to make public.

Book building offerings.

In case of a book building ,the company initiated an IPO offers a 20% price band on the stocks to the investors.

The interested investors bid before the final price.

The ultimate decision regarding the price of shares is determined by investors bid.

What are the advantages of investment in IPO?

IPO allows the companies to raise capital by selling shares.

In addition to that , companies don’t have to repay the capital raised through bidding.

Companies can offer stock as an incentive,bonus or as a part of employment contract.

This is sometimes use to retain key people .In addition,equity can be used to acquire other businesses as well.

What are the disadvantages of investing in IPO?

The company needs to disclose the financial status at a regular basis as there are multiple owner of the company.

There is no guarantee of success of your company.

You have to afford all the expenses in the company.

Sometimes there may be a conflict or tension between shareholders in decision making.

How to invest in IPO?

For investing in an IPO ,an investor has to choose an IPO he wants to apply for .

An investor can apply for an IPO through his bank account or trading account.

The ASBA (Application Supported by Blocked Account) is mandatory for all IPO applicants .

After all formalities,an applicant has to bid for shares.

It is done according to the lot size which are the minimum number of shares offered by the company.

Written By Deepak Kumar

So here we have discussed the meaning of Initial Public Offering and its Types and benefits .

Also Read – know everything about National Pension Scheme.

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