What is an IPO?

Are you new to investing and wondering what IPOs are all about? Or are you looking to know more about how you can invest in one? Well, here’s a quick guide on the basics of Initial Public Offerings or IPOs.

An Initial Public Offering is a process where a privately-owned company sells its shares to outside investors or the public for the first time. This process helps them turn into a public company. Here, external investors, who are interested in buying shares of the company, cannot be in any way involved at start of the company.

Often, the founders of small, privately-owned companies invest a large amount of their personal wealth or money while starting up their business. Once the business gains traction, they might need additional funds to continue this business growth. That is where an IPO comes in.

Why do companies offer an IPO?

A company might need money for expansion, repaying loans, improving business, renovating infrastructure, etc. With an IPO, the company gains liquid assets in exchange for company shares. Once the IPO shares are issued, the company is listed up on stock exchanges. A company is also seen as being trustworthy, since it goes through a rigorous process before being allowed to issue an IPO.

There are many advantages as to why a company decides to go public:

  • Helps raise capital: This capital can be used to fund capital expenditure, research and development, debts, etc.
  • Public awareness: Potential buyers / customers / investors are now aware about the company and its products.
  • Increases liquidity: The company starts reaping benefits in the form of cash for all the hard work applied.
  • Gives credibility: When a company enters the open market, the need for it to be managed better arises. Transparency in dealings and regular reporting to regulatory authorities is required. By doing so, the company adds to its credibility.

So what’s in it for you?

Well, while the excitement surrounding IPOs tends to be high, it might not always be that you reap rich returns. Long-term or experienced investors might have better luck in the IPO market than a short-term investors or a new-comer.

If you are planning on investing in an IPO for the first time, here are a few things that you need to remember:

  • Research well and evaluate the company
  • Pick companies that have strong investment brokers
  • Read the prospectus
  • Be cautious towards scanty, hyped and biased information