Initial Public Offering – A boon or a curse for investors?

An Initial Public Offering (IPO) or a share market launch is the very first sale of a stock by a company to the public. It is a type of public offering as a result of which the private company turns into a public company. This kind of process is used by various companies to raise or expand their capital and become a public based trading enterprise. Many companies that undertake an IPO also request the assistance of an investment banking firm which acts in the capacity of an underwriter by aiding them correctly to assess the face value of their shares i.e. the share price.

Whenever a company lists its shares on a public exchange platform, the money paid by the investors for the recent issued shares directly goes to the company. This is in contrast to a much later trade of shares on the exchange and the money has to pass in between the investors.

Therefore an IPO, allows a company to gather a wide pool of investors to provide itself with capital revenue for future growth, repayment of debt or working capital. A company that sells its common shares is never required to repay its capital back to the investors.

Once a company is listed, it will be able to issue extra common shares via a secondary offering, thus providing itself again with a capital for expansion without incurring any debts.

This ability to raise large amounts of capital from the market in a short span of time is a key reason for many companies seeking to go public.

There are many benefits on offer after becoming a public limited company. Some of them are listed below:

1)            Bolstering and assorted equity base

2)            Allowing cheap access to capital

3)            Providing, exposure, prestige and public image to the company

4)            Attraction and retaining better management and employees through liquid equity participation

5)            Facilitating acquisitions from various investors

6)            Creating multiple financing opportunities via equity, convertible debt, cheaper bank loans, etc.

 

Thus IPO’s can be a mixed bag as an investment option. One must carry out the necessary investigations, background and reference check for a newly turned public limited company before investing their money. However, one must also simultaneously remember that investments are a long term process and one must show maximum patience during the investment period. The long term benefits can prove really a boon, if the investor shows the right amount of patience while investing in the right place.