Initial Public Offer (IPO) is a kind of source by which money is collected from the public in the stock market for the first time in order to fund its projects. In return, the company can provide shares to its investors.An initial public offering (IPO) is said to be the type of public offering in which the shares or the stocks of a company are sold to the investors for the first time.
It is observed that IPOs are generally issued by the smaller and younger companies in order to expand their capital. IPOs are also issued by the large companies which are privately owned and are seeking to become publicly traded. In Stock Market IPO, the issuer acquires the assistance of an underwriting firm, which greatly helps to determine about the type of security to issue, the best offering price, the amount of shares which are to be issued and the time to bring it into the stock market.
Stock Market IPO involves a process in which an unlisted Company can be listed on the stock exchange by offering its securities or shares to the public in the primary market for the first time. The objective of stock market IPO relates to the expansion of existing activities of the company or setting up of some new projects or any other objective specified by the company in its offer document. Also, the IPO objective is to get the company existing equity shares listed by diluting the stake of existing equity shareholders through offer for sale.
An IPO (initial public offering) is also referred to a flotation. In this, an issuer or a company proposes to the public in the form of ordinary stock or shares. Stock Market IPO is also defined as the selling of stocks by a private company to the public for the first time. They are generally offered by some new and medium-sized firms, companies or industries that are looking for funds with a purpose to grow and expand their business.
Types of Companies involve in IPO
Basically, there are two types of companies are involved in IPO. They are- private and public. A private company has few shareholders and its owners are not able to expose more information about the company. Shares of privately held companies are reached through its owners only. On the other hand, public companies have sold their shares at least a portion of their business to the public and thereby trade on a stock exchange.
Why companies must go public?
The main reason for going public by the companies is to increase the amount of cash through the various financial avenues that are offered. Besides, some other factors are also including:
- Public companies are usually getting better rates when they are issuing debt due to their increased scrutiny.
- As long as there is market demand in stock market, so a public company is always issuing more stocks.
- According to stock market, trading in the open markets means liquidity.
- Being public also makes it possible to implement things by the company like employee stock ownership plans, which helps in attracting the top talents of the industry.
Factors to be considered before applying for an IPO
There are certain factors which are needed to be considered before applying for Initial Public Offerings in India:
- Historical record of the firm which provide the Initial Public Offerings
- Promoters of IPO, their reliability and past records
- Products offered by the firm and their potential for going forward
- Whether the firm has been entered into a collaboration with technological firm or not
- Project values and various techniques of sponsoring the plan of the company
- Productivity estimation of the project
- Risk aspects that are engaging in the execution of the plan
Important steps involved in the Stock Market IPO process
Registering for Initial Public Offering (IPO) must be considered at the top of every business-owner’s dreams. It is said to be one of the important events for the life of a company. Becoming an IPO-registered business means that company is opened to the public, which is also termed as “going public.” It is the first time that company owners will be selling a part of their ownership to stockholders and later do trading in the stock market exchange.
Being an IPO company enables the business to gain more capital for massive expansion. It offers founders or owners enough cash in return because of all the hard work that they have put in which is also considered as a payback period. It also attracts and benefits employees of the company as by offering stock options.
- Have a trusted and reliable management team of the company
Going public requires greater demands by following the complexity of the stock market IPO process. Thus, putting the right people to manoeuvre the process will help a lot. They must possess the strong communication skills for handling investors or SEC queries and be able to clearly present the vision and plans of the company.
- Be ready with financial reporting systems of the company
Once the company goes to the public, it requires a thorough disclosure of the financial health or status of the company thereby adopting more complex financial and accounting requirements that are mostly needed for the company. The company must also have a credible system in place by ensuring that all data have been recorded in a timely and accurate manner.
- Choose the best investment bankers
Investment bankers or the “underwriters” play an important role in the stock market IPO process. They are looking for and approaching potential investors. They also act as the sales guys that are offering to buy shares for the company. Thus, characteristics of an ideal investment banker include sales and distribution capabilities and strong analyst coverage. Some of the popularly known biggest underwriters are Goldman Sachs, Credit Suisse First Boston and Morgan Stanley.
- Write the story of the company or overview of the business
Write the story of the company or overview of the business that enables to prospect investors in order to see the objectives of the company. This story must present company’s goal, mission, and vision. Also, emphasizing strengths of the company, greater market opportunity, and about company’s investment which proved to be best in the long run.
- Registering with SEC
Next step would be to present the final story of the company as well as the prospectus to SEC for the registration and review process. Initial prospectus contains all information regarding the company except for the offer price and date, which are not shown yet. Normally, the registration with SEC for the company takes more than a month.
- Start the tour of meetings for the company
Once the company has complied with SEC’s comments and recommendations, then people may now proceed for meeting with their prospective investors. Also, they must travel and attend a lot of meetings, press conferences (if budget allows), city/area visits with the purpose to introduce their company and the merits of investing in it. This is also considered as their marketing venue in order to attract more investors.
- Setting Price of IPO
After completing the review process and generating a list for possible IPO investors, the company’s board of directors and underwriters must agreed on a value to which the company setting a price per share of stock.
- Now, get ready for a publicly-owned company
Nothing is said to be more exciting than going public. After pricing, the IPO normally closes on the 4th business day. Issuer and selling stockholders are issuing the shares to the underwriters, and the underwriters are buying those shares at a 7 percent discount more or less. Issuers are still undergo SEC quiet period for 25 days by following the pricing of IPO. This period gives broker-dealers a great time to approach and deliver IPO sales materials to investors.
How one can invest in Stock Market IPO?
An IPO is an opportunity for the people in order to own the first publicly-traded stock in a company and to potentially realize capital gains.
If a person wants to invest in Stock Market IPO, then few points kept to be in mind:
- Determine the proper timing
Some IPOs are spread all over the news, but others are more not clearly expressed. People can check with the Securities and Exchange Commission (SEC) for the most recent updates of IPOs.
- People learn how to buy
Generally, not all IPOs are open to the general public, and many underwriters are not interested in selling the shares to average investors. People are able to buy directly into the IPO through the bank managing the sale, an online venue, or a stockbroker who are interested to invest in the IPO on their behalf.
- People do research in depth
Not all IPOs are famous and successful. Even though a company’s stock may be getting to increase in value after going public, so it can be quickly loses its value after the first week of trading. Before investing, it is advised to discuss the reasons why you want to invest in the IPO with your Financial Advisor. Your advisor can help in reviewing the analyst reports of the company, researching overall sector performance, and looking at the company’s history. Consider all the reasons for the IPO, the quality of its executives, and the patents and trademarks as it may be relying on to building its business model.
People can easily find much information, along with potential risks the business faces, in the company prospectus, which must be filled with the SEC as part of the IPO.
- Evaluate the price
The public offering price should be above the dilution for an IPO. It means the amount of money that the original investors are averaged per share. Otherwise, it indicates that the business hasn’t gained in value. People can find the information about dilution in the company prospectus.
Researching an IPO help the people to see past the hype and determine if buying the stock of a company is a good move for them. People also should consider about how the stock fits into the overall their asset allocation strategy. If not sure about all of the factors involved, then consult a Financial Advisor for help in order to make perfect decision about whether or not to invest.