An IPO, or Initial Public Offering, is when a company issues shares of it’s stock to the public for the first time. It seems as if the volume of companies initiating a IPO, or initial public offering, is finally starting to increase. While we may never again hit the peak that we saw in the late nineties, it is nice to see things heating up.
An Inital Public Offering, also known as an IPO, is one of the most popular form of financing for any company through accumulating a wide pool of investors in a single platform. Company generally uses its IPO proceedings for business expansion, loan payment, future growth or any other sort of purposes stated before the regulating authority before subscribing for IPO. Business entities sell common shares through the IPO procedure and this liability never requires a company to repay the capital to investors. This allows a company to have the cheaper and safest form of borrowing for itself.
There are many other reasons for which a company usually likes to go public. IPO Stocks allows a company to issue more common shares for business expansion through secondary offering (via the form right shares). This also allows the company to gain quick access to borrowing as it is most easy and less time consuming for a publicly listed company to withdraw money from any source. People also don’t deny investing their money through IPO as it is regulated.
Beside the advantages there are several other disadvantages that a company incurs with the IPO stocks. It has to allow a great amount of marketing and accounting cost to find the optimal value of its offering and make people aware about the offerings. The company also has to disclose its financial performance and other internal issues related to management which can be a competitive issue for the company over its rivals.
There are several parties involved in the IPO stock process besides investors and the issuer. To get a guaranteed sale of the initial public offerings company’s usually deploys investment banks that are commonly referred as underwriters. They take the guarantee of the IPO sale to the public in exchange of notable commissions from the issuer. An underwriter keep safe the issuer from any non-selling of the IPO offers. If any lot remains unsold an underwriter is bound to buy it with the issue price. This is why underwriters form a syndicate while issuing large IPO sales. The commission of the underwriters varies based upon the fundamentals of the issuing company. This commission takes up to 8% in some cases.
Corporations have to submit all their financial data and the valid reason to issue stocks before the regulating authority. Some companies can withdraw additional to their par value noted as premium but it is based upon the reputation and fundamentals of the company. Investors are given with the IPO based on lottery system if the subscription is over the required amount.
IPO offer does not only sell to general publics. It is also offered to institutional investors and foreign investors even in the form of quota or placement.
Before going on for public issue the company should find the optimal price of its initial offering. Companies spend millions in this sector so that the pricing is not overpriced or underpriced. The overpriced stock may lose its value from the very first day of trading which may incur loss for the investment bank and also lose the marketability of the company in the view of publics. Underpriced stocks may lead the company toward losing the cash benefits that would be erode out by the smart stock players in the secondary market.