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There are a few fundamentals that aspiring stock investors should understand before they start making stock market investments. A corporation can raise capital from the equity market in two ways: through an Initial Public Offering (IPO) and a Follow-on Public Offering (FPO). Corporate bonds are another option for businesses to raise capital.
Read on to learn the difference between IPO and FPO.
Table of Contents
An IPO
Initial Public Offering is a process through which a private corporation goes public by initially issuing shares to the general public. A corporation is referred to as an ‘issuer’ when it issues its shares to the public and does so under the direction of multiple investment banks. The company’s shares are traded on an open market when the IPO is complete. Going public for a private firm is typically done to raise capital. The corporation can raise money and collect shares on the open market to expand its business successfully.
An FPO
In a Follow-on Public Offering (FPO), a firm that has already gone public issues more shares to the general public. The goal of an FPO is often to raise additional funds for the business, which it might utilise for a range of things, including expansion, research and development (R&D), or debt repayment. An investment bank will normally be hired by the company to underwrite the FPO, whereby the bank will buy the shares from the company and then sell them to the public. The investment bank will also decide on the offering price and work with the business to decide how many shares will be issued.
IPO VS FPO
Distinguishing between IPOs and FPOs involves examining three key distinctions.
Objective:
An IPO’s primary goal is to raise capital from the public, enabling a company to expand and enhance its operations. After a successful IPO, if a company requires additional funds, it may issue FPOs.
FPOs, on the other hand, are primarily aimed at expanding a company’s equity base, although they can also be utilised to decrease promoter shareholdings.
Performance:
The distinction in performance lies in the level of information available to investors before purchasing shares. In an IPO, investors review a preliminary document called the red herring prospectus but lack significant guidance or a track record of the company.
Investors in FPOs, however, have access to essential information and a track record, providing insights into market interest and the company’s post-IPO performance. Nevertheless, investors gauge the worthiness of stocks based on the sale of equity stakes.
Profitability:
IPOs have the potential to yield higher returns for investors as they participate in the initial growth phase of the company.
FPOs, being less risky due to the availability of comprehensive information, offer investors the opportunity to analyse past performance and make informed assumptions about the company’s growth.
However, FPOs are generally considered less profitable than IPOs since companies are in a stabilisation phase at this stage.
Conclusion
An IPO signifies the initial sale of a private company’s shares to the public, allowing the company to raise capital by offering ownership stakes to a broad spectrum of investors on a stock exchange. In contrast, an FPO typically involves a publicly traded company issuing additional shares to the public. This secondary offering can either raise extra capital for the company through the issuance of new shares or involve the sale of existing shares by current shareholders. Understanding the distinctions between IPO and FPO is crucial for investors, as these events have different implications and are essential principles for navigating the stock market successfully.