The Initial public offering (IPO) is when a company issues common stock or shares to the public for the first time.
It is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.
Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.
In an IPO, the issuer gets the assistance of an underwriting firm, which helps in determining what type of security is to be issued (common or preferred), the most suitable offering price and the proper time to bring it into the market.
IPOs are a risky investment as it is tough to predict what the share will do on the trading day as well as in near future because, there is no substantial historical data to analyze the company’s standing. In addition to that the companies up for an IPO undergo a transitory growth period which is subjected to uncertainty for future values.
Overall, going public is an enormous undertaking and the decision to go public requires careful consideration and planning. Experts recommend that business owners consider all the alternatives first (such as securing venture capital, forming a limited partnership or joint venture, or selling shares through private placement), examine their current and future capital needs, and be aware of how an IPO will affect the availability of future financing.
The primary advantage a business stands to gain through an initial public stock offering is access to capital. In addition, the capital does not have to be repaid and does not involve an interest charge. The only reward that IPO investors seek is an appreciation of their investment and possibly dividends.
Another advantage of an IPO is increased public awareness of the company. This sort of attention and publicity may lead to new opportunities and new customers.
Book Building Process
In order to raise money, a company plans on offering its stock to the public and this process is called Book building process. This process is used either by an IPO (Initial public offering) or FPO (follow-on public offers) for effective price discovery. It is a mechanism where, during the tenure for which the IPO is open, bids are collected and compiled from investors at various prices, which are higher or equal to the floor price (lowest price at which bids can be made).
The offer price is decided after the bid closing date. As soon as the cost of the stock is determined, the issuing company can then decide upon the division of its stock to its bidders.