An IPO is considered the first entry of a company into the public stock market. It can provide attractive returns because it offers an opportunity to gain profit by issuing shares. The company must have securities and exchange commission approval to hold an IPO. An IPO is a significant step for a company as it provides the opportunity to raise a large amount of capital , which ultimately increases the company’s growth potential and also aids in expansion.
An IPO is divided into two parts: the first is the pre-marketing phase of the offering , and the second is the initial public offering itself. When a company is interested in an IPO, it will make a public statement to generate interest.
Steps in the IPO process:
Proposals: The underwriters present proposals along with the offering price, number of shares , and estimated time frame to the public.
Underwriter: The company selects its own underwriters who lead the IPO process. The company can appoint one or more underwriters as per its requirements .
Team: The team consists of underwriters, lawyers, certified public accountants, and SEC experts.
Documentation: The primary IPO filing document is the S-1 registration statement , which is further classified into two parts. The S-1 includes information about the expected date of filing , which is updated continuously.
Marketing and updates: Marketing materials are created for pre-marketing purposes . Companies take necessary steps to meet the requirements of the public share offering.
Board and processes: A board of directors is established to ensure the smooth functioning of the process and oversee financial and accounting information.
Shares issued: The company issues its shares on the estimated date.
Post – IPO: The underwriters may purchase an additional amount of shares after the IPO date within a specified time period.
Advantages of an IPO:
Companies can raise capital and gain access to investments by offering an IPO.
Companies can increase their exposure and public image , which will ultimately enhance the sales and profit of the firm.
They can raise additional funds through secondary offerings.
Disadvantages of IPOs :
IPOs are expensive. The cost of maintaining a public company can be significant .
Fluctuations in a company’s share price can distract management, forcing the firm to disclose business information.
Proper time, effort , and attention are required for reporting.
There are two alternatives to an IPO:
Direct listing: A direct listing occurs when an IPO takes place without any underwriters. In this process, the issuer bears more risk if the offering does not perform well.
Auction: In this process, the price of an IPO is not predetermined . Buyers can bid for the shares they want and the price they are willing to pay. Bidders who are willing to pay the highest price are allocated the shares.
The main purpose of an IPO is to generate capital, provide liquidity to the company ‘s founders, and take advantage of a higher valuation.
Eligibility criteria to invest in an IPO:
Must hold a valid PAN Card.
Must have a demat account.
Who can invest in an IPO:
Qualified institutional buyers , such as mutual funds.
Non-institutional investors like corporate firms.
Retail individual investors.
IPOs help companies raise capital to satisfy various business needs , such as expansion . They improve the public image and visibility of the company and enhance market capitalization . They are also beneficial for ordinary investors, as they can buy company shares and become stakeholders . In some cases, due to reasonable pricing , one can purchase multiple shares of the company at an affordable rate. Investing in IPOs can facilitate wealth creation.
IPOs offer an opportunity to invest in a company at its early stages, from which investors can benefit in the future. Investing in initial public offerings can be a significant opportunity for investors. They must be well-informed about risks and make informed decisions based on research while staying up-to-date about the latest IPOs.