Now tell me, when you are in need of money what do you do? You either borrow money from your parents/friends or take out a loan.
Exactly in the same way when a company is in need of money it either raises funds via IPO or could raise debt by issuing non-convertible debentures or bonds.
Today, let's focus on what an IPO is?
IPO stands for Initial Public Offering. It is a process in which a private company or corporation sells its shares to the public and in return, it receives capital from the public. In this manner the company raises funds and the investors become shareholders.
Now understand a few facts.
While we buy a share normally the price is decided between the buyer and seller. but in the case of an IPO, the price is decided between the company and the investor. At times, in a few cases, the price of the IPO is overpriced or overvalued.
Recently in Jan 2021, Indigo Paints had issued its IPO. Through IPO, indigo paints had raised Rs 1170 crores and in return diluted promoters' stake from 60% to 54%. This means in return for Rs 1170 crores, Indigo Paints gave the public a share of 6% in their company. Its offer price was Rs 1,290 and got listed at Rs 2,607.50. Yes, a listing gain of approx 50%.
But this is not always the case, in March 2020 SBI cards offered a price of Rs 755 per share and were listed at Rs 658. This share was meant to be with one of the best financial records but still had to face a loss of 13% due to the prevailing market condition then. So one should have 360-degree research before investing.
Now, what does FPO mean?
FPO stands for Follow on Public Offer. It is a process by which a company, which is already listed on an exchange, issues new shares to the investors or the existing shareholders, usually the promoters.
With the expansion and growth of a company, it is likely to make further issues of stocks with the help of FPO but there are many companies whose IPO is their only public offer.
FPO VS IPO
Here are a few differences between IPO and FPO
It depends on your risk level and goals. Your risk levels need to be extremely high to invest in an IPO because you do not have much idea about the company. An FPO is relatively a safer bet for individual investors and new investors as there is already available information about the company after it has listed on the stock exchange. However, equal research is needed when you invest in equity - whether you do it via the route of IPO or FPO. IPOs have more potential to return more money if the company kicks off to a good start but there are more ‘ifs’ to it. To understand your profile as an investor and then take the decision.
You can understand more about your risk profile - by taking the test on our calculator here. - Click here.
You can also check our youtube video to learn in detail about IPOs and how do they work - Click here