IPO – All You Need to Know About Initial Public Offering
IPO stands for Initial Public Offering and is also known as “going public”. It is a form of public offering wherein a private company transforms into a public company by selling its shares on a securities exchange. The main idea behind IPO is to generate capital, which the company can then use for execution of plans related to business expansion like payment of loans and dues, settle investments made by private investors, setting up of new plants, etc. IPO is the largest source of funds with long or indefinite maturity for the company.
As lucrative as IPO looks, the process behind launching an IPO is quiet lengthy and has a lot of cost associated with it. Firstly, the issuing company has to file a document also known as prospectus with the respective securities exchange containing the details of the proposed offerings. The company then hires an investment banking firm also known as underwriter whose main job is valuation of the shares and manage the entire listing process for the company. The IPO is generally open for subscription for a specific period. Based on the demand the company then allots shares to the subscribers. The IPO is listed in the stock market, once the allotments & other regulatory formalities are completed. The investor can henceforth buy and sell shares through stock exchanges.
When investing in the IPOs you buy a share of the company based on its present valuation. Once the company grows, the valuation of the company shall also be increasing and thus increasing the worth of your holdings you have in that company. IPO does have a lot of advantages and disadvantages as well. One of the main advantage as said earlier is the benefit of raising capital, which can be used to fund research and development (R&D), fund capital expenditure, or even used to pay off existing debt. Investors then start trading once the company gets listed which in turn leads to an increase in market share of the company.
IPO, even with many benefits, does pose challenges as well. Need for added disclosure for investors is one of the most important challenges. These companies must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC). More importantly, especially for smaller companies, is that the cost of complying with regulatory requirements can be very high. Some of the additional costs include audit fees, the generation of financial reporting documents, accounting oversight committees and investor relation departments.
A company must evaluate all of the potential advantages and disadvantages before deciding whether to go public or not. The process of evaluation happens mainly during the underwriting process.The company works with an investment bank that weighs pros and cons of the public offering and determines whether it is in the best interest of the company for that period.
Some of the world’s top most IPO’s include The Alibaba Group in the year 2014 worth $25 billion, Facebook in the year 2012 worth $16 billion, Agriculture Bank of China in the year 2010 worth $22 billion etc. The world of IPO has a lot to offer and to stay updated on the entire latest buzz on IPO keep following InformalNewz.com.