What Does IPO Mean
An Overview
If you’re new to the stock market, you might have heard of many companies coming up with their IPOs. But have you ever wondered what IPO means? If you have, then this article will help you clearly understand the concept and what it means for the company and the investor. So, without any further ado, let’s begin.
What Does IPO Mean?
An acronym for Initial Public Offering, an IPO is the process through which a company sells its shares to the public for the first time. By purchasing the shares of a company, the public becomes shareholders of the entity and is entitled to the profits generated by it.
An IPO is advantageous not only to the investor but also to the company as well. By selling its shares to the public, the company raises money, which it can use to further its business objectives.
How Does an IPO work?
Now that you’ve gotten the answer to the question ‘what do you mean by an IPO?’, let’s take a look at how ipo works.
Assume a company, XYZ Limited, needs roughly Rs. 5 crores to expand its business. Now, it plans to raise this amount by issuing its shares to the public. The company goes through the entire IPO process and succeeds in selling its shares.
Now, by purchasing the company's shares, the investors become shareholders and are entitled to a share of the profits made by the entity. And the Rs. 5 crores that the company received from the sale of its shares to the public can be used by it to raise money for expansion or pay off its debt obligations.
Why Do Companies Opt to Go for an IPO?
Apart from being able to raise funds for its operations, there are many reasons why a company might want to issue its shares to the public. Here’s a quick look at a few of them.
- It gives existing investors an exit
- It makes the company more credible
In an Initial Public Offering, there are usually two components - a fresh issue of shares from the company as well as an offer for sale (OFS) from its promoters. Through this OFS component, early investors, including the company's promoters, can sell a portion of their stake to the public. The funds so obtained from an OFS go to the individuals and entities selling the stake and not to the company. By selling their shares through an upcoming IPO 2023, early investors can realize the returns from the investment that they made.
A company that’s listed on a stock exchange after a successful IPO tends to enjoy better visibility and credibility than a company that hasn’t gone for one. This makes it easier for the company to get loans and other credit facilities granted to it.
Conclusion
Hope you now know what an IPO means and how it can be advantageous for the company. That said, if you wish to invest in an upcoming IPO, first make sure to have an active Demat account in your name.
