What IPO necessary? What are the upcoming IPO’s
When a company sells its shares to the public for the first time, it is called Initial Public Offering or IPO. There are many ways a company can raise funds but they have to return that money with a good amount of interest ex: Bank.
But when a company collects funds from an IPO, it doesn’t have to return any money. Instead, they sell some of their holdings from the company in exchange for money. Now the investors who buy the shares becomes the shareholder of that company.
IPO is also referred to as ‘going public’ as a company sells some of its shares to the public. Ten days after the IPO the company is listed in the stock exchange. Remember that a company is listed in the stock exchange only after an IPO.
The shares allotted in an IPO are arranged by the investment banks.
There may be various reasons for a company going public which are discussed in the next section. Prior an IPO, a company discloses all its details in the Red Herring prospectus Also Read: Different types of prospectus
IPO is referred to as the primary market as new securities and bonds are issued first in an IPO. After allotting the shares in an IPO, it gets listed to the Stock Exchange which is referred to as the secondary market.
Why companies go public?
There are various reasons for a company to go public. They may be
- Expansion for further growth
- Reduce the previous debt of the company
- Launch new products and services
A company discloses the reason behind an IPO in its Red Herring Prospectus. The prospectus consists of various details about the company which is helpful for the investors.
The main reason for the company’s expansion is exposing the business to a wider range of people. This increases the pool of potential customers which dramatically increases sales and profit.
Whenever a business or company grows it gives very good returns to its shareholders. But if that company achieves some disappointing growth, it can result in the fall of share price giving negative returns to its shareholders.
A company may have debts from its investors, banks, private corporations, etc. In order to reduce some of its debts, a company decides to go public.
Click here Upcoming IPO’s in 2018
Many other companies decide to launch some new products or services into the market. Due to lack of funds, they are unable to launch it. This is also a time when a company decides to go public in order to collect some funds. This even enlarges the market size.
Some of the largest IPO’s in the history
Types of IPO’s
Basically, IPO’s are of two types:
- Fixed Price Issue
- Book Building Issue
As the name suggests, In Fixed price issue companies along with investment banks decides a fixed price for a share which later they offer to its investors.
Investors have to subscribe the shares in an IPO on that fixed price as the company decides to offer. Let us understand this better with an example:
In a fixed price issue, suppose a company decides to go public keeping the price as $100 per share which is fixed for everyone. Then investors have to subscribe those shares on $100 per share only.
Whereas in Book building issue, the company along with other investment banks decides a price band. Within that price range, investors have to submit their bid.
The lowest price in the price band is called the Floor Price while the highest price is called the Cap Price.
For example, Suppose a company decides a price band of $100-$110. Here, $100 is the floor price and $110 is the Cap price. The maximum difference between the floor and cap price cannot exceed more than 20%. In our case, the difference is 10%.
Generally, IPO’s are open for 3 to 10 days. During this time period, investors who are interested in buying those shares apply for it.
If an IPO is of fixed price, investors have to apply at that particular price only. If it is book building, investors can bid at any price within the range they want.
Companies don’t guarantee its investors to provide the number of shares they applied for. There are some allotment processes which will decide whether an investor will get the applied share or not. Also Read: How IPO’s are allocated to its investors
After the application, the allotment process takes place. Later, investors receive their shares. After a few days of allocating the shares to its investors, the company is listed on the stock exchange.
Inside the stock exchange, investors can easily buy or sell their shares with other investors.
In an IPO, investors cannot buy shares fulfilling their wishes. The issuing company decides a lot size. Based on that lot size or multiples of that lot size, investors can subscribe the shares.
For ex: If a company decides a lot size of a 50 share. Then investors can subscribe the shares in 50 or multiples of 50 like 100, 150, 200, 250, 300, etc.
The process of buying shares in an IPO is completely different than in the stock market. In IPO, investors buy shares directly from the company. While in stock market investors buy shares from other investors who were allocated during an IPO.
Also Read: How IPO’s are allocated to the investors?
Click here List of Upcoming IPO’s in 2018