WHAT IS IPO IN THE STOCK MARKET? || WHY DO COMPANIES GO PUBLIC?
IPO (initial public offering) is a process that leads to the transformation of a private company into a public company. It gives smart investors and opportunity to earn a handsome return to investments. Not every upcoming IPO gives you a good result, some IPO opens up with benefit, while some opens up with risk. They both go hand in hand. So IPO (initial public offering) is a public company or organization selling a portion of its stake to the investor. IPO is generally initiated to generate the new equity capital for the firm that is capital for the future. Once the IPO is listed an allotment list comes out of the firm that ensures the owners. They can now trade their stocks in the market.
There are two common types of IPO-
1- Fixed price offering
2- Book building offering
a) Fixed price offering
Fixed price offering is something that can be known as the issue price. The issue price is something that some corporations that for the initial sale of their shares. Afterwhich the investors who invest in IPO come to know about the price of the stock that the organization decides to make public. If the investor buys the IPO, they must make sure that they pay the marketed price of the shares.
b) Book building offering
20% price band on the stocks is offered to the investors by the companies that are initiating an IPO. Then the investor decides how many shares they intend to purchase and how much money they are willing to pay per share.
WHY DO COMPANIES GO PUBLIC?
In finance the term “go public” means a business offers securities for sale to the public. Also, they obtain a listing on a stock exchange. Institutional investors or individuals buy the stock and can trade it on a stock exchange.
There are some reasons listed below that why a company goes public-
1- Raising Capital
Startup businesses can finance their operations through private arrangements with an individual, large corporations, or venture capital. By going public, the startup business has to open up its full financial information about itself. It is regulated by the SEC. Mostly outside investors are more willing to buy shares in a company whose growth prospects they can analyze. This way company raises its capital.
It is a form of advertising. The company launches itself into the market under advertising and gains prestige among the customers, market analysis, and shareholders. It gives the company great exposure and makes their product better known in front of their customers.
By going public, the company provides liquidity to its shareholders. Companies’ major shareholders may sometimes want to cash in on the wealth they have tied up in the business. It gives the ability to the shareholders to sell their holding. On the other hand, it also enhances the shareholder’s wealth. They can use the publicly traded stock as collateral for loans.
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