Any company, no matter small or big needs money from time to time for its growth and development. Apart from their operational capital, they may need funds for expansion, clearing debts, or meeting financial gaps. While there are many ways a company can raise funds, going public and through institutional investors is most common. They can either raise money through debt (loans or bonds) or via equity (by offering shares to investors).
When it comes to raising money through equity, the company issues shares in the market for investors. This, in turn, gives the investors a stake and ownership in the company. A company can release its shares in two ways – through an IPO or an FPO. Let’s look into it and understand what these are and how they are different.
IPO – Initial Public Offer
When a company goes public, issues its shares, and lists itself on a stock exchange, it is called an IPO. In an Initial Public Offer, the company issues shares to the public which are then traded on a stock exchange.
What does on in the background for an IPO?
Going public isn’t just about releasing a press release and issuing shares, it is a lengthy and complex process. There are numerous entities involved that audit the company, and review the financials and intent for the IPO. Also, there are other complicated processes like book building, rate quotes, red herring, notice, issuance, etc.
For a company looking to raise money through an IPO is a big responsibility. Going forward the company is answerable to its stakeholders, investors, and how they operate. The company receives money during the initial allotment and at the face value of the share. Any price change while traded on the exchange in the secondary market only affects the market capitalization and net cashflows.
As for the investors, they get ownership of the company. Moreover, they can have some stake in the revenue based on the type of shares or through dividends. Also, based on the changing price of the share in the market, the investors can book a profit by selling or buying more shares.
FPO – Follow-on Public Offer
An FPO, as the name suggests, is a follow-up round to issue additional shares to the public in exchange for money. A company might raise an FPO for multiple reasons including that to raise more funds. It could be to diversify the stakeholder base, dilute shareholding patterns, or for other administrative reasons. Similar to an IPO, there are proper regulations and legal processes for an FPO. However, contrary to the IPO, in an FPO the company is already registered on the exchange. Hence, new and current investors can make informed decisions based on past performance, trends, and the company’s track record. Also, investors can compare if the new valuation or their current holding in the company is worth their while. Investors can buy and sell their holdings through their trading account and avail of the shares.
Apart from an IPO and FPO, in terms of equity, there are things like buybacks, stock splits, dilutions, swaps, and whatnot.
Public investments and equity trading can be risky decisions, so investors and users must act with caution. You must do your research and due diligence before investing in any company, IPO, or FPO.