An initial public offering (IPO) is the first time the company sells its stocks to the public. Up until an IPO, the stock of a company will only in the hands of its founders, employees, or private investors. Once the company decides to become a public enterprise, any person wishing to purchase a fraction of the companies share can purchase it in the stock market.
Why It Is Important: An IPO enables the company to solicit funds from the public, which will be used to grow the company, repay any debts, or reinvest in other profitable projects. For potential investors, an IPO is the first chance to purchase the shares of a specific company.
Example: Suppose a new startup firm is called XYZ Tech and it is ready to offer its Initial Price Offering. Before the IPO, only the proprietors of the company and some investors own the stock of XYZ Tech. The IPO allows the company’s stocks to be listed in a stock exchange, thus after it, anyone can hold a share of XYZ Tech.
Why Are IPOs Important:
For the Company: Kind of like marketing, a successful IPO raises capital(money) that can be used for increasing or developing the business.
For the Investors: It becomes an opportunity for the investors to purchase stocks during the infancy of the company and in case the company is successful, make profit later on.
Taking a company public through an IPO seems to have multifold advantages, some of which are stated below:
Attract Investments: The company earns huge investment to develop their business or clear outstanding obligations.
Increase Visibility: The venture in the public markets increases the chances that consumers, funding agencies or the press gets to know, and recognize the organization.
Enable Exiting by Shareholders: IPOs also give the opportunity to some early investors or the owners of the company to liquidate some of their holdings and earn a return.
Also Read: Understanding IPOs: How to Invest in Initial Public Offerings
Real-Life Example:
Let’s take Zomato, an Indian food delivery company, as an example. The shares of the company where held post the IPO only by the founders and some private stake holders. Along with the public stock exchange listing on the NSE and BSE in July 2021, it has enabled the public and others to purchase shares of the enterprise. and sell them
Zomato got an opportunity to raise capital which could help them in expanding the scope of services they render as well as increase their technology and enhance customer service while at the same time give investors an opportunity to enjoy the increase in value of the business.
Stock Price at IPO: ₹72 – ₹76 per sharePost-IPO Performance: Zomato’s stock price witnessed a little of initial volatility but there was a lot of interest given to the stock by investors which clearly illustrated the market opportunity and the risks associated with investing in a newly listed company.
