Show You are now following "IPO". You can better manage news alerts and Unfollow this about page on the This service requires you to register on the website. Login Register In the world of finance, going public refers to the process where a business offers securities for sale to the general public, thereby obtaining a listing on a stock exchange. It can be in the form of equity securities or debt securities. Through this process, the companies become an entity that can be publicly traded and owned. Companies decide to go public when they earn profits and capital returns and if the public demand for the company's share increases. This process is also known as Initial Public Offering or an IPO. In the initial days of a business, it is aided by promoter funds that include the entrepreneur's savings. Afterwards, when it earns profit, angel investors fund the firm. Subsequently, when it grows further, the company is financed by Venture Capitalist firms and private equity firms. When the company wants to raise its capital further and extend its reach, it opts for IPO. Why do companies launch an IPO?A company launches IPO for various reasons. Here are some of the reasons why companies decide to go public: Better Public Image IPO lets a company gain more exposure and recognition. This, in turn, will allow customers to trust the company and the product and services they provide. It can lead to easy mergers and acquisitions alongside smoother cash flow due to its public listing of shares. Raise Capital One of the evident benefits of having an IPO is that it increases capital. The other methods of raising funds, such as applying for loans, are expensive and riskier. Banks offer a limited fund based on the analysis of the company applying for a loan. The interest rates are usually high when it comes to bank loans. On the other hand, IPO can help the company have a lump sum amount that can be used for various purposes like clearing off debts, research and development, expansion of business, etc. In other words, the more the funds, the better the possibility of growth of the business. Price Transparency Selling the equities will generate a lot of liquidity. It will make the company reach a stable financial condition, thereby increasing price transparency. This can also generate a liquid entity for shareholders who have been associated with the company for a long term. Value Assessment Once a company's stock gets listed in the exchange, its value is equal to that an investor is willing to pay for. Hence, it lets outsiders know the current value or worth of the company. Value assessment is indispensable for a company willing to grow in future and carry out mergers and acquisitions. Enhanced Credibility As a result of the launching of IPO and increased visibility, the company's credibility can also increase. The fiscal data can become more transparent and thereby fulfil SEBI's requirement by reporting to it periodically. Also Read: Upcoming IPOs in 2021 LimitationsEvery coin has two sides; similarly, every financial decision, over time, has boundaries as well. IPO is no exception. It has certain limitations also. Few of them have been stated in the following section:
Key IPO TermsTo understand IPO and its benefits, we should be accustomed to some technical terms that are indispensable in this domain. The following are some of the most commonly used terms associated with IPO along with their definitions:
Market Capitalization formula can be expressed as:
Book Value = Total Assets – Total Liabilities
Importance of an IPOIPO is a significant step in a company's development. It evidently enables the concern to raise capitals. Additionally, it plays an instrumental role in the firm's growth by increasing its credibility and exposure. The most significant function of an IPO is the inclusion of the public in the company's growth. Since price transparency is maintained in the process, the public can evaluate the company's worth, thereby checking the company's susceptibility to any downfall. A company that is already listed on the stock may need additional capital for various purposes. Post IPO, if a company issues shares to the public, it is called FPO or Follow on Public Order. Need for FPOFollow on Public Offer or FPO is a process that begins after an IPO. Here, the company that has already listed its shares in the stock market goes to issue shares to more investors further. It is carried out to diversify the company's equity base. It is comparatively less risky than an IPO. The main objective of FPO is subsequent public investment. Is it good for a company to IPO?An IPO is a big step for a company as it provides the company with access to raising a lot of money. This gives the company a greater ability to grow and expand. The increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well.
What happens when a company becomes an IPO?An IPO is an initial public offering. In an IPO, a privately owned company lists its shares on a stock exchange, making them available for purchase by the general public. Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public.
Why would a company want to go public?Going public refers to a private company's initial public offering (IPO), thus becoming a publicly-traded and owned entity. Businesses usually go public to raise capital in hopes of expanding. Additionally, venture capitalists may use IPOs as an exit strategy (a way of getting out of their investment in a company).
Does an IPO increase the value of a company?However, it does mean that the company will have a higher valuation. An IPO valuation is the process by which an analyst determines the fair value of a company's shares. Two identical companies may have very different IPO valuations simply because of the timing of the IPO and market demand.
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