In the stock market, an Initial Public Offering (IPO) is regarded as a company’s birth in the eyes of the public. It presents numerous opportunities for retail investors but requires caution when identifying IPOs for investment. And while IPOs can be lucrative for investors waiting to hit big, it also holds the potential of becoming a dud and fizzing away.
In the Indian stock market, you can buy shares of a company through the primary or the secondary market. In the primary market, you can purchase company stock that is issued for the first time through the IPO.
Understanding the reasons behind an IPO
When a company requires additional funds or capital to expand its offerings, it typically chooses the IPO route. Hence, when you purchase company shares you become a part-owner of the company. Over a period, share prices of the company could rise or fall due to various reasons impacting the company.
Here are some essential terms that could be helpful when navigating the IPO journey. These include:
- Offer document – Am offer document provides crucial information about the company. It contains data regarding the company’s financial condition, the objectives of the initial public offering, profiles of the company’s promoters and more.
- Red Herring prospectus – This is an initial or preliminary prospectus submitted by the company issuing the IPO as part of its public offering of securities. It does not include particulars such as the price of the shares or the number of shares offered.
- Letter of offer – A letter of offer is an offer document of the rights issue of shares.
- Fixed price issue – Here, the IPO issuer decides the issue price that is stated in the offer document.
- Price band – The price band is a price range within which you can bid in an IPO.
- Cut off price – This is the price at which the company’s stock is given to investors.
Advantages of an IPO
A private company that is looking to raise capital to fund its growth has the option of going public by issuing its shares, rather than taking bank loans. An IPO is looked at as a lucrative option to investors since it is regarded as the fastest growing option due to its potential of raising funds in a brief timeframe. IPO advantages include:
- Company branding and awareness – When a company issues an IPO, its enhanced exposure could increase its sales and make the company brand known to the public through media exposure
- Mergers and acquisitions – A company that issues an IPO is regarded as having a better average of acquiring other businesses. However, it could also become attractive to larger companies looking to buy it.
- Staff recruitment – A company listed on the stock market has higher chances of recruiting skilled employees, management and executives.
Disadvantages of an IPO
It can be an extravagant undertaking for a company to issue an IPO. These expenses are not only seen during its start-up phase but also over the years due to the ongoing costs and the time needed to maintain the company’s brand and public status. Other IPO disadvantages include:
- Complete Disclosure – A company can no longer afford to keep its financials, tax information, and other critical details a private matter once it is listed in the Indian stock market.
- A decline in autonomy – When a company goes public, shareholders get voting rights to make critical decisions in the company through a board of directors. The former owner or the management team may have to give up control over critical business decisions.
Despite risks, an IPO is considered an attractive proposition for investors because companies are in a transitional phase. It can be thrilling and nail-biting for investors to invest in companies in transitions as the prospects of a big win and the company expanding profitably is high. However, it is vital to know the risks before taking a chance of investing in the company. If you view a lucrative IPO, you can invest in it by opening a Demat and trading account with a well respected for services brokers such as Kotak Securities.