In the last few months, you must have heard the word IPO a lot, and wondered what is an IPO? How an IPO work? Why do companies do IPOs? How can I buy shares from the IPO?
Through this blog we will be covering IPOs in-depth, how an Ipo works, and help you get a better understanding of it.
What’s is an Initial Public Offering? (IPO)
The full form of IPO is an Initial public offering, it’s a debut of a company that is owned privately into the market through its listing on the stock exchange. When a company gets listed on the stock exchange the public/investors can buy and trade their stocks. The firm that issues the IPO does so to raise capital through the primary market and as soon as the IPO is complete public investors can start trading shares on the secondary market.
Offering shares to the public allows the firm to raise more capital as compared to being a private company. It also creates an opportunity for the investors to buy shares of a business that can substantially grow big in the coming year. In short, it’s a win-win situation for the firm putting out an IPO as well as for the investors.
How an IPO work?
There are multiple steps that a private corporation needs to take before filing for an IPO and offering shares of their company to the public. The business needs to do regulatory filing, select an investment as well as get clearances from the securities and exchange commission.
No IPO is the same but many upcoming IPOs come from relatively new companies that have grown rapidly and are in the $100-$200 million range. Unicorn companies that list themselves automatically get more attention from the business world and from the investors.
These are the five steps in the IPO process and this section will cover how an IPO work
Choosing an underwriter for IPOs: For a private corporation preparing for an upcoming IPO, the firm needs to hire an investment bank, which plays the role of underwriting. In the process of underwriting the investment bank helps the private cooperation to prepare for the IPO. The underwriter will agree to a firm commitment, that is they purchase all stocks that will be issued and resell them at the IPO.
- Filings with the securities and exchange commission: One of the most extensive processes in the IPO process, the private cooperation files with the Securities and Exchange Commission (SEC) and process of multiple regulatory filings is completed by the help of the hired underwriter. A document that includes key financial information for prospective investors is issued in this step and is called a Red herring.
- Marketing: The underwriter now needs to create excitement in the market for the upcoming IPO. This is done so that the investors can know about the IPO and gather information from the prospectus.
- Pricing: After getting approval from the Securities and exchange commission, the underwriter and issuing private cooperation decide together the price and the date when the stocks will be traded for the first time. They also decide the price and the number of shares that will be offered to the public. This stage allows the investors to use key fundamental analysis metrics to analyze the IPO price and value.
- Listing of the IPO: Once all the steps are done and the private cooperation gets a heads up from the securities and exchange commission, the IPO goes public on the stock exchange. In the beginning, for a small while the underwriter hired needs to insure stability of price by purchasing more shares if required.
Why do companies go public?
The main reason that private companies go public and have IPOs is to raise capital which can happen for a publicly listed company. Going public also helps the firm to build its public profile.
There are mostly advantages of having an IPO and becoming a publicly-traded company, there are also a few disadvantages that private cooperation needs to consider.
Advantages of going public-
- More capital can be raised.
- Gaining publicity and raising its profile as a listed company on an exchange.
- Increase in market share due to growth and public awareness.
- Original founders and angel investors can realize profits and get an opportunity to exit their financial commitment by selling their shares
Disadvantages of going public-
- The high cost of underwriter fees, auditor fees, and legal fees.
- Market pressure is seen as the business shifts from a long-term view of growing a business to the short-term goals of pleasing shareholders.
- Required public disclosures and filing annual reports, such as form 10-k, with the SEC.
- Potential for private owners to give up some control of the business by sharing decisions with public shareholders, angel investors that are part of the board and other board members.
Most Anticipated Upcoming IPOs in 2022
This year ahead we are likely to witness a surge in IPOs as the many startups, companies are planning to go public by year-end
These are a few upcoming posts that you should keep your eye out for-
- Adani Wilmar
Is an IPO a good investment?
The fact that a company is going public doesn’t necessarily mean it’s going to blow up, there are plenty of successful IPO stories but there are failures also. While investing money in an upcoming IPO the investor should do their part of research and then only put their money into it.
Also, do remember that a short-term return may not be what was expected but in the long term, the same share can reach it’s high and give maximum returns.