What is IPO? How Does it Work?

What is IPO? How Does it Work?

Initial Public Offering or IPO mainly refers to the process of offering shares of any private corporation to the public within the new stock issuance. Public share issuance will allow the firm to raise capital from the public investors. The transition from private to public firm is avital time for the private investors for realizing gains from investment as that will typically include share premiums for the current private investors. At the same time, IPO will allow the public investors to take an active part in the offering.

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Major Takeaways To Follow In IPO

Before you plan and proceed further with an IPO, it is better to understand some of the major takeaways coming your way. This will eventually help you to use the Initial Public offering in your favor for sure.

  • An IPO will refer to the procedure of offering shares of Private Corporation to the public in new stock issuance.
  • IPO can also be stated as an exit strategy for the founders and early investors of the company to realize the full profit from the said private investment.
  • It is mandatory for the companies to meet the requirements by exchanges and the SEBIto hold up an IPO.
  • Companies are likely to hire investment banks for marketing, gauging demand, and setting up the price and date of IPO, as some of the services included.
  • IPOs are here to provide the firms with the golden opportunity to procure capital by presenting shares through the current primary market.

How IPO Actually Works

Before the IPO, every company is stated to be private. As one private firm, the business might have grown with a relatively smaller number of shareholders, including early investors like family, founders, and friends with professional investors like angel investors or venture capitalists.

  • Whenever a company reaches a stage in the growth process where it is stated to have reached the maturity level for rigors of SEBIregulations with responsibilities and benefits to public shareholders, it will start to advertise the interests in moving towards the public.
  • This stage of growth will mainly occur whenever a firm reaches a private valuation of around INR 3 crore, which is also stated as unicorn status. But, the private firms at multiple valuations and with private profitability can also be qualified for an IPO. It solely depends on the competitive nature of the market and the ability to meet listing needs.
  • IPO happens to be one major step for a firm as it provides the same with access to raise a good amount of money. It will provide the firm greater ability to grow and then expand. The increased level of transparency and share listing credibility are other factors to help procure better terms while seeking borrowed funds.

More To Realize

A company’s IPO shares are priced through some of the underwriting due diligence. Whenever a company plans to move public, the previously owned private share ownership will then get converted to public ownership. During this stage, the existing shares of the private shareholders will become worth the public based trading price.

The share underwriting will also include some special provisions for the private to public share ownership. Most of the time, the transition from private to the public will be a significant time for private investors to cash in and earn the returns whenever they expect. The private shareholders might hold onto shares in the public market or just sell a certain portion of all of it for the ultimate gains.

At the same time, the public market will open up a major opportunity for multiple other investors to purchase shares in the company and then contribute capital to the shareholders’ equity of the firm. The public comprises any institutional, retail, or individual investor who is then interested in investing in the firm.

To top it all, the number of shares that the company plans to sell and the price for which these shares sell are some of the generating factors for the equity value of the company’s new shareholders. Such equity of the shareholders will represent shares as owned by investors when made both public and private. However, with the IPO, the equity of the shareholders will increase greatly with cash from primary issuance.

The Two Parts To Follow

In terms of IPO, there are mainly two parts to address. The first is its pre-marketing sector of offering, and the second one is an initial public offering. Whenever a company gets interested in an IPO, it has to advertise to underwriters by working on private bids. On the other hand, the company can also try to make one public statement to generate interest.

Learning about the upcoming IPO rules and trends is necessary if you want to gain better investment out of it. So, researching from time to time is really important.

Disclaimer