A Deep Dive into IPOs and Reasons Why Companies Opt For Them


Diversifying your financial portfolio with stock market investments can significantly fortify your financial standing. Amidst the array of investment strategies, IPOs emerge as prominent avenues for profit generation, endorsed by various companies. Gaining remarkable traction within a short span, IPOs have sparked curiosity in the market. While many investors recognize its potential, comprehending its essence is pivotal for unlocking its advantages.

Understanding “what is IPO?” forms the bedrock of informed investing. An IPO, or Initial Public Offering, is a pivotal facet of a company’s equity offerings, providing a multitude of benefits for its subscribers. Typically, companies embark on the IPO journey to transition into the public domain. Although investing in IPOs can be astute, recognizing the intertwined dynamics of risk and potential returns is equivalent to any investment decision.

Today, our discussion centers on the essence of IPOs and how they contribute to nurturing corporate expansion. This narrative acts as a preliminary roadmap to IPOs, offering a guiding light to comprehend their importance and the intricacies of their procedures.

What is an IPO?

An Initial Public Offering (IPO) indicates the transformation of a private company into a public entity. An integral shift takes place as soon as the company releases its shares to the market. This move enables private enterprises to raise capital from the public, directing it towards diverse investment endeavours.

The launch of an IPO ushers forth a multitude of benefits. Companies leverage this strategic move to secure substantial funds, fueling their developmental aspirations and amplifying their brand presence. With this infusion of capital, growth becomes tangible, allowing companies to expand departments, execute robust projects, and surge ahead in the market.

Investors eyeing an IPO opportunity often delve into the prospect of reaping decent profits. While investing in an IPO can be a judicious decision, the underlying principle of risk and reward remains integral. It’s imperative for investors to equip themselves with comprehensive knowledge to recognise the inherent dynamics of profit and loss in the IPO domain.

An IPO leads to a significant shift in a company’s trajectory. The transition from private to public triggers a transformation in the very nature of the company, ushering it into the realm of public trading. As shares become available in the trade market, diverse trading activities come into play, further shaping the company’s financial journey.

Different Types of an IPO

The Initial Public Offering represents a strategic shift from private to public ownership. It’s the pivotal moment when a private company takes its first step into the public sphere, offering a range of IPO options to the public. Potential investors keen on participating in a company’s IPO are presented with an array of Initial Public Offering choices. Once you are well aware of what IPO is, it is also crucial to know its types.

Here are the two primary kinds of an IPO:

  • Fixed Price Issue

In the Fixed Price Issue, as the title suggests, the share price within the IPO is predetermined. This fixation on share price is a result of meticulous evaluation of the company’s value, aimed at minimising investment risks by establishing a uniform price accessible to all investors.

  • Book Building Issue

Introduced by SEBI in 1995 for enhanced share pricing, the Book Building Issue departs from fixed pricing norms. In this approach, no predetermined price is set. Instead, the company presents potential investors with two distinct scenarios within its IPO, empowering them to participate and invest according to their preferences.

Top Benefits of IPOs for Companies and Investors

An IPO is a beneficial investment option for going public. Many companies use it for the betterment of the organisation. It also brings earning potential for both parties, such as the seller and buyer. Let’s explore the most sought-after IPO benefits for companies below:

  1. Fund Raising

Fundraising is among IPO’s top benefits for companies transitioning to being public. A company can collect sufficient funds by issuing an IPO to the public. Companies can use this fund to invest in different sectors and projects, pay debts, expand work, and carry out many more endeavours.

An IPO is a beneficial option for the company that needs funds for the investment. Along with this, it helps companies to upgrade their technology and resources to tackle market challenges.

  1. Credibility and Recognition

Using an IPO brings credibility and recognition to the company in the market. By going public, a company can gain more brand value and recognition in the market as its share would be available to trade.

This will enhance the reputation and credibility of the company in the target market. Through IPO, the company shows its capabilities to provide good returns to the shareholders. As a result, shareholders show their belief and confidence in companies and invest in them.

  1. Liquidity

An IPO enables a company to provide more liquidity to its shareholders. Through this, shareholders get the ability to sell their shares in the market openly and earn more profit. It offers more flexibility and financial freedom to all investors.

By doing this, investors can invest their earned profit in other options, fulfil their personal needs, or buy company shares again if they find it profitable.

  1. Attracts Talented Employees

By going public and issuing an IPO for the public, a company grabs the attention of top employees from the industry. Being public shows the company’s success ratio and development ability in the market.

Top employees will find it a better option for their future so they will take more interest in your company. It will offer a better working culture and growth potential for all the employees.

IPO and SIP: Which is Better?

IPO (Initial Public Offering) and SIP (Systematic Investment Plan) offer varied investment paths. IPO, presented by companies going public, introduces initial shares. Meanwhile, SIP, facilitated by mutual funds, involves fixed investments over a designated span.

IPO options include fixed rate or book building, boosting growth and diversification. SIP embodies disciplined investing, catering to beginners. Opting for IPO or SIP requires goal assessment and market risk comprehension. Evaluate objectives and potential gains wisely, for both IPO and SIP deliver distinct investor benefits within the backdrop of market uncertainties. Whether you wish to invest in SIP or put your money in an IPO depends on your specific goals.

Wrapping Up

Going public via an IPO is a significant company milestone, showcasing credibility and market worth. Understanding its essence reaps benefits like fundraising and attracting talent, forging a robust reputation.