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When a company needs money to expand its business capacity or clear off its debt, then it goes public. Both Initial Public Offering (IPO) and Follow-on Public Offer (FPO) are processes that help them get money from investors and fulfill their business objectives.
IPO and FPO can be excellent investment opportunities, provided you understand the purpose, risks, and benefits. Every beginner who is looking to invest in an IPO must have a basic knowledge about these two routes of fundraising from the stock market (check out our previous post to have an in-depth knowledge of IPO).
In today’s post, we will be discussing a detailed explanation of the difference between IPO and FPO.
Table of Contents
What Is an IPO?
IPO is a process in which a private company goes public by issuing shares to the general public for the first time. The company that offers its shares to the public is called an ‘issuer’, and it does so with the guidance of several advisors/merchant bankers. Once the IPO is done, the company’s shares are traded in an open market.
The primary reason for a private company going to the public is to raise money. By selling its shares in an open market, the company can collect and raise funds to grow its business successfully.
Types of IPO
Investors may invest in two types of IPOs:
- Fixed Price Issue – In a fixed price issue, the price of each share is fixed beforehand, and investors have to pay the exact amount upfront based on the quantity applied for.
- Book Building Issue – In book building issue, the issuer declares a price band. The final price is determined after gauging investor response within the band.
What Does an IPO Signify for a Company?
When a company is first set up, it receives funding from investors, venture capitalists, a variety of corporations, and sometimes the government as well. Once the company reaches an even larger state of expansion, and its funds dry out or become insufficient, this company then launches its IPO, goes public for the first time, and is then listed publicly on exchanges.
This means that the company will receive funding when one decides to invest in it but this also comes with a great deal of responsibility for running the company in an efficient manner.
The goal is for shareholders to not have to run any losses. This also means increased liquidity for the company and its shareholders. Understanding the dynamics of how companies raise capital through IPOs and the implications for shareholders can be vital for investors. Plus, gaining insights into different trading strategies, such as intraday vs. positional trading, with Share India can help you navigate the stock market effectively.
What Does an IPO Signify for Investors?
When you buy a share or any number of shares in a company, this means that you are getting partial ownership in that company. At times, when a company decides to go public, it also opens options for employees to earn profits via employee stock ownership plans, which are also known as ESOP. A company may offer its employees ownership in stock, which also has multiple benefits like profit sharing.
What is FPO?
FPO is a follow-up to the initial public offering. It is the issuance of shares after the company has been listed on the stock exchange. In other words, an FPO is an additional issuance of shares, while an IPO is simply the first issuance.
What Does an FPO Signify for the Company?
An FPO is carried out with the goal to raise additional capital as well as reduce any existing debt that the company needs to pay off.
Similarity between IPO and FPO
A company can carry out an IPO/FPO in one of two ways.
- Dilutive Process: With the aid of a dilutive IPO/ FPO, a company decides to issue fresh shares in the market, which the public can buy. However, the company’s value will remain the same. It reduces the value and earnings per share by increasing the quantity of the outstanding shares.
- Non-dilutive Process: A non-dilutive IPO/FPO takes place among the larger shareholders of the company, such as the founders or board of directors. In this type of process, individuals of the company sell the shares they hold privately in the market. This technique does not increase the number of shares that are available to the company, but it does increase those available to the public. Unlike a dilutive IPO, this method does not do anything to the number of shares of the company, but it does change the company’s EPS (earnings per share). Non-dilutive FPO is a very rare process.
IPO and FPO – The Key Differences
The following are some significant differences between an IPO and an FPO:
Primary Purpose
A company launches an IPO to get funds for expanding its business or providing an exit to early investors like venture capitalists (VCs). As a company gets bigger, it needs capital to run its operations smoothly. Hence, they launch an IPO seeking money from investors.
Once the IPO is successful and the company receives the money, it may need more funds to become even bigger. This is where an FPO may come to their rescue. An FPO may serve two purposes. It can help a company increase its equity base or decrease promoter shareholding.
Company Profile and Quality
Analysing the company profile is vital for making profits in the market. When you have a lot of information about a company, you can invest sensibly. However, if the company is dubious, you might not get much information about it.
When a company launches an IPO, you have to check the Draft Red Herring Prospectus (DRHP) to find more details about its line of work, business prospects, financial results, and key risks. Besides these, you may not find much information about the company. Investors investing in IPOs mostly rely on their good judgement and Share India’s experts’ recommendations to pick the best IPO. As a fact, choosing the best company in an IPO requires an acute sense of judgement and an ability to sift through data.
An FPO is offered by companies with a stable track record in the stock market. Hence, it is easy for an investor to find information about the company’s stock performance and track record. To estimate the valuation, you can quickly scan the stock’s demand and supply over its lifetime. Also, you may check how the company performed after listing its IPO.
Hence, it is easier to find credible information about a company during the FPO process than during the IPO process.
Performance
Most investors consider IPOs more remunerative than FPOs. Since an IPO gives investors early-stage access to a company, it is considered more lucrative than FPOs. However, IPOs are generally riskier than FPOs. Since FPOs are usually launched by companies with a proven track record, they are more stable than IPOs. While IPOs are launched by companies in the expansion phase, FPOs are launched by companies in the stabilisation phase.
From the above, it is clear that IPO or FPO investment choices can be seen as investment vehicles for accruing the benefits of an early bird. The decision of whether to invest in an IPO or to wait for FPO is something that must be taken with due diligence and reading the detailed report shared by the Share India experts team. With Share India’s expert advice, an investor gets the best choices for reaping the benefits from share investments.
Conclusion
As you have gone through the initial public offering and follow-on public offering, both of these can be opportunities to invest in the share market. Depending on your investment, you can know the key differences between an IPO and an FPO. To invest in the stock market, you need to open a Demat account. You can easily open a Demat account online with Share India in just a few steps. Browse different instruments to invest in the stock market.
Disclaimer: Any advice or information in the post is general advice for education purposes only and is not responsible for generating any trading strategy for anyone. Please do not trade or invest based solely on this information.