An IPO is the first sale of stock by which a company can go public. The stock is offered for sale to the general public by the company seeking to raise capital for expansion.
Companies come out with public issue wherein they invite public to contribute towards the equity and issue shares to meet their fund requirements by sharing ownership with investors. When one buys shares in the company, he/she becomes shareholders and for that matter owner in the company by the size of share value.
- IPO allows companies to raise capital by selling shares. Moreover, companies don’t have to repay the capital raised through the issuance of IPO.
- Companies can offer stock as an incentive, bonus, or as part of an employment contract. This is sometimes used to retain key people. In addition, equity can be used to purchase or acquire other businesses.
- By getting listed on a stock exchange business receives wide media coverage enhancing company’s visibility and recognition of its products and services.
- Companies need to disclose critical information including financial information on a regular basis.
- As public companies have directors who are meant to oversee management’s actions on behalf of shareholders, in some circumstances actions of management may be limited.
- Going public is an expensive and time consuming process. The legal, accounting and printing costs are significant and these costs will have to be paid regardless of whether an IPO is successful or not.
Analyzing an IPO
- Credibility and track record of promoter
- Product and services of the company and their potential
- Past performance of the Company offering the IPO
- Project cost, the means of financing and profitability projections
- Involves risk factors