A Brief Introduction of Initial Public Offering

If you like to remain updated through news, then while surfing different news mediums, you must have come across the term IPO or Initial Public Offering. An IPO is a process through which a private company becomes a publicly traded company by offering up some of its shares in the stock market.
In this article, we will discuss what is the meaning of an Initial Public Offering as well as how and why the entire process is conducted.
 
Initial Public Offering Meaning
The full form of the IPO term is Initial Public Offering. In this method, privately operated firms and organizations turn themselves into publicly traded companies by putting forward some of their shares in the stock market.
Normally, a private company has a handful of shareholders, and when it decides to go public, the ownership of the company is distributed among multiple shareholders who are allotted the shares of the company in exchange for a specific amount of funds. The company also officially registers itself on the stock exchange through the IPO.
 
How a company offers an IPO?
Before going public or initiating an IPO, a company hires an investment bank to handle the financial technicalities of this complicated process. After multiple discussions, the company completes an underwriting agreement with the investment bank in order to finalize the financial details of the Initial Public Offering.
Next, the company files a registration statement with the SEBI along with the underwriting agreement so that SEBI can properly evaluate the information provided in the registration statement and find out if it is right. After the evaluation process has been completed, SEBI allows the company to announce a date for the IPO.
 
Different types of IPOs
 
Initial Public Offerings are mainly of two different types. When a company initiates an IPO, it mentions the type of IPO the company is conducting so that the investors can make the right investment decision. Here are some more information about these two types of IPOs:
Fixed Price Offering
The Fixed Price Offering is a simple and straightforward IPO process where investors pay the fixed price decided by the company in exchange for the company shares. The company already announces its IPO share price in advance so that while making an application, investors can apply accordingly.
Book Building Offering
In the Book Building Offering, the investors have to go through a bidding process in order to get a chance to receive the shares of the company. The company stock prices come with a 20% price band, and the concerned investors state the price they are willing to pay in order to receive those shares (during the IPO application process).
In this type of IPO, you will come across terms like ‘floor price’, which denotes the lower price band level, whereas the upper limit is known as the ‘cap price’. During the application stage, the interested investor needs to mention the number of shares they are willing to purchase along with the price they will pay to the company. This process helps the company determine the price of the shares (based on the investors’ interest).
If you are interested in investing in IPOs, you should conduct a thorough research about the companies that are conducting the IPOs and then decide whether it will be fruitful to invest in those companies. IPOs can provide investors with the opportunity to earn money quickly, but at the same time, they can be a bit more risky than other investment options, which is why you should operate very carefully.