IPO (Initial Public Offering)

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What is IPO?

An IPO (initial public offering) is referred to a flotation, which an issuer or a company proposes to the public in the form of ordinary stock or shares. It is defined as the first sale of stock by a private company to the public. They are generally offered by new and medium sized firms that are looking for funds to grow and expand their business.

It is also referred to as “public offering”

Basics of private and public:

Companies fall into two broad categories:

  • Private
  • public

A privately held company has fewershareholdersand its owners don’t have to disclose much information about the company. Most small businesses are privately held, with no exceptions that large companies can be private too, like Domino’s Pizza and Hallmark Cards being privately held.Shares of private companies can be reached through the owners only and that also at their discretion. On the other hand, public companies have sold at least a portion of their business to the public and thereby trade on astock exchange. This is why doing an IPO is referred to going public.

Why go public?

The main reason of going public is to raise good amount of cash through the various financial avenues that are offered. Besides, the other factors include:

  • Public companies usually get better rates when they issue debt due to increased scrutiny.
  • As long as there is market demand, a public company can always issue more stock.
  • Trading in the open markets meansliquidity.
  • Being Public makes it possible to implement things likeemployee stock ownership plans,which help to attract top talent of the industry.

Factors to be considered before applying for an IPO:

There are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India:

  • Historical record of the firm providing the Initial Public Offerings
  • Promoters, their reliability and past records
  • Products offered by the firm and their potential going forward
  • Whether the firm has entered into a collaboration with technological firm
  • Project value and various techniques of sponsoring the plan
  • Productivity estimates of the project
  • Risk aspects engaged in the execution of the plan

General Terms involved in IPO:

Primary market: It is the market in which investors have the first opportunity to buy a newly issued security as in an IPO.

Prospectus: A formal legal document describing the details of the company is created for a proposed IPO, also making the investors aware of the risks of an investment. It is also known as the offer document.

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