Initial Public Offering or IPO has garnered the attention of investors in the last few years. More companies are going public through IPO, and the investors are lapping up most of the IPOs. Why are investors so interested in IPOs? The benefits an IPO offers are what has made IPO a popular market instrument. Let us see in this article the benefits of investing in an IPO. Before diving into the benefits of IPO, we will learn what an IPO is.
What is an IPO?
IPO is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. A private company that has a handful of shareholders shares the ownership by going public by trading its shares. The company’s name is listed on the stock exchange through the IPO.
Let us look into the benefits of IPO for companies and investors.
What are the Advantages of IPO to Issuing Company?
The advantages of an IPO for the issuing company can be listed as follows:
1. Fundraising
One of the main reasons for going public is to raise funds. Sixty-three companies collectively raised ₹1,18,704 crore (USD 15.4 billion) through IPOs in 2021. The proceeds from an IPO give ample opportunities to companies. The issuing company can use funds raised from IPO to finance R&D, clear debt, take care of capital expenditure, acquire new technologies or realize other possibilities. The money collected by an IPO can transform a company’s growth trajectory.
2. Exit Opportunity
Many shareholders would have invested their money long-term in the company. An initial public offering comes as a significant exit opportunity for stakeholders, whereby they can receive the returns for their investments or, at the very least, liquefy the capital they currently have tied up in the company.
3. Increases Brand Equity
For a company to grow, it has to expand its customer base. An IPO can provide exposure as it thrusts the company into the public spotlight. A company must undergo intense scrutiny to ensure its credibility in completing an offering. It is known that public companies are trusted more, which can lead to increased credibility.
4. Decrease in the overall cost of capital
One of the obstacles for a young or growing company is the cost of capital. Raising funds from other sources such as banks or venture capitalists comes at the cost of higher interest rates or giving up ownership which is not faced in the case of an IPO. Also, after going public, a company can raise additional capital through follow on offerings in the stock market.
5. Stock as a means of payment
The advantage of being a public company is that it can use publicly traded stock as a mode of payment. The company can pay its employees through stocks. It is a practice to compensate top-tier employees through stocks. Acquisitions are a part of the company’s growing process. However, the cost of acquiring doesn’t come low. A public company has the option to issue shares as payment during acquisition rather than paying in cash.
What are the Benefits of IPO to investors?
The benefits of IPO to investors include,
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Listing gains
One of the possible benefits of investing in an IPO can be the listing gains if the company opens at a price higher than the offer price. If you had applied for a number of shares at the offer price and say, you receive your shares and the company opens at a price higher than the offer price, you can procure huge gains.
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Liquidity
When a company goes public, investors can start selling their shares in the open market. After going public, the stocks are publicly traded, giving investors the flexibility to buy and sell shares anytime based on the bid-ask spread providing liquidity.
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A fair chance for retail investors
SEBI has eased several norms to ensure small retail investors get a fair chance in the allocation of shares in IPO. For instance, the minimum allocation under the retail quota is 35% ( as on 08-Aug-22). SEBI has decreed that if the issue is oversubscribed, subject to availability, all retail investors be allotted at least one lot of shares. If one-lot-to-each-investor is not possible, a lottery system should be used to allocate IPO shares to the public.
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Stringent IPO Norms
SEBI has laid stringent IPO norms to protect retail investors. The company’s prospectus consists of all the relevant information like performance, financials, growth, risks, and plans of the company, thus giving investors a chance to make an informed decision.
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Buy Cheap
When companies go public, they offer the shares at a discounted rate. If the company has the potential to grow big, it allows investors to buy the shares at a lower price, possibly creating wealth in the long term if the company makes it big.
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Shareholder Ownership Authority
If the shares are allotted during an IPO, you will become the company’s shareholder, procuring voting rights in annual general meetings.
The above benefits may lure you to invest in an IPO. But, remember that how an IPO performs entirely depends on the market sentiments on that particular day, and also several other factors impact the chances of listing gains. One must conduct a proper study and background check, thoroughly analyze its performance, financials, and future business prospects, consider all the related factors and make an informed investment decision. If you are ready to start your investment journey, take the first step by opening a Demat account.
