Types of IPO
Different types of initial public offerings allow companies to raise funds using varied pricing methods.
Fixed price IPO: In this type, the company sets a fixed offer price for its shares before they are made available to the public. Investors know the exact price in advance, which helps them decide the amount they want to invest.
Book building IPO: Here, the company provides a price range rather than a single price. Investors place bids within this range, and the final issue price is decided based on overall demand and bidding patterns.
How significant is an IPO for a company?
Before we compare IPO vs FPO, let us quickly look at the importance of an Initial Public Offering from the perspective of the company.
1. Provides access to capital
An IPO provides companies with access to a vast pool of capital from public investors. Through the process, the company can raise large sums of money for expansion, research and development, debt repayment or other strategic initiatives.
2. Enhances visibility and credibility
Once the IPO is complete, the company gets listed on stock exchanges. This enhances their visibility and credibility in the market, enabling them to potentially attract more customers, partners and talented employees.
3. Provides liquidity to existing shareholders
An Initial Public Offering provides liquidity to existing shareholders by allowing early investors and employees to sell their stakes to the public.
How significant is an IPO for investors?
An Initial Public Offering is not only a major milestone for a company; it could potentially bring in a lot of benefits for the investors as well. Here are some ways in which an IPO is significant for investors.
- Access to previously inaccessible companies
By participating in an IPO, investors gain access to shares of a company that were previously inaccessible to them.
- Potential for substantial returns
By investing in a company that is still in its nascent stages, investors can potentially yield substantial returns if the company performs well in the future.
What is an FPO?
A Follow-On Public Offering (FPO) is when a company that has already completed its IPO and is listed on the stock exchanges offers additional equity shares to the public to raise additional capital. The additional shares are usually offered at the current market price. However, it may also be issued at a discount to the market price to attract more investors. To put it simply, all public equity share issues after the Initial Public Offering are termed FPOs.
An FPO also helps companies fund expansion plans, reduce existing debt, or strengthen their balance sheets without taking on additional borrowings. For investors, it offers another opportunity to invest in a listed company with known financial performance, governance standards, and established market presence.
How significant is an FPO for a company?
Now that you know what these two avenues are, let us quickly look at the significance of a Follow-On Public Offering before moving on to the differences between an FPO and an IPO.
1. Access to additional capital
An FPO enables publicly listed companies to raise additional funds without resorting to debt financing or other costly alternatives. With the additional funds, the company can bolster its financial position, pursue growth opportunities and strengthen its balance sheet.
2. Serves as an indicator of confidence
A Follow-On Public Offering demonstrates management's belief in the company's future performance and could be viewed as an indicator of confidence in the entity’s prospects.
How significant is an FPO for investors?
Similar to the level of significance of an FPO for a company, it is also significant for investors. Here are some factors that make an FPO quite significant to the investors:
1. Price advantage
When companies launch an FPO, they mostly offer the additional shares at a discount (at a price lower than the current market prices of the shares). This discount makes investing in FPOs an ideal investment opportunity to buy the shares of a company at a lower rate.
2. Financial statements
Unlike an IPO, which provides little information about a company's financials, an FPO provides extensive financial information. As the company is already public, investors can easily analyse its historical performance and determine whether investing in the shares will yield profits.
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Key Differences Between IPO and FPO
While shares are issued to the public in both IPOs and FPOs, they differ in several key aspects. Understanding what they are is crucial for making informed investment decisions. Here is a tabulated comparison of IPO vs FPO:
Particulars
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IPO
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FPO
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Timing
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Equity shares are issued to the public for the first time
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Equity shares are issued to the public after the company is already listed on the stock exchanges
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Company
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Issued by privately-held companies
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Issued by publicly traded companies
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Information availability
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Information regarding the company is not easily available
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Information on the company is publicly available and can be accessed by anyone
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Price determination
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Offer price is determined by the company along with the lead managers to the issue based on various factors
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Equity shares are typically offered at the current market price or at a slight discount to the current market price
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Underwriting
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Always involves underwriting by investment banks
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Underwriting is generally not involved
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Regulatory requirements
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Subject to rigorous regulatory scrutiny and disclosures
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Regulatory requirements are less stringent
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Potential for higher returns
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Carries a high potential for capital appreciation
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Lower potential for capital appreciation
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Risk
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Carries a much higher risk
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Comparatively lower risk
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Conclusion
With this, you must now be well-versed in the differences between an FPO and an IPO. Now, it is essential to understand that despite the differences, both of them are crucial mechanisms for companies to raise capital from the public markets. In addition to providing companies with a host of benefits, investing in these equity share issues can also be hugely beneficial for investors.
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