Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on a stock exchange and hence goes public. In simple terms it is first time the owners of the company give up part of their ownership to stockholders. Before that, the company is privately-owned. It’s also called “going public.”
The company which offers its shares, known as an ‘issuer’, does so with the help of investment banks. After IPO, the company’s shares are traded in an open market. When the shares trade freely in the open market, money passes between public investors.
The company which wants to raise its funds generally goes for an IPO. So it is simply a money making process. The money can be used in various ways, such as re-investing in the company’s infrastructure or expanding the business.
A public company can always issue more stocks and they get better rates also when they issue debt.
A company going for an IPO needs an investment bank to serve a number of purposes.
- One of the primary roles of an investment bank is to serve as a sort of intermediary between corporations and investors through initial public offerings (IPOs).
- They do the required asset management for large investment funds.
- The bank evaluates the company and determines a price at which to offer the stock shares.
- It also advises the company to whether go public or raise funds through any alternative means.
- It also advises the company for mergers and acquisitions and to evaluate the fair price of acquisitions.
- There can be more than one investment bank.
Apart from the various advantages, there are some disadvantages too of going for an IPO.
- The cost associated with the process is the first factor.
- Private companies do not have to disclose their information to anyone, but being after IPO they will have to disclose certain business and financial information which can prove helpful to their competitors.
- For the management, efficient attention and effort is required.
- There is also a risk that required funds will not be raised.
- There is also a loss of control over the company because of the addition of new shareholders.
- The business owners may not be able to take many shares for themselves. In some cases, the original investors might require them to put all the money back into the company. Even if they take their shares, they may not be able to sell them for years.
- Business owners could lose ownership control of the business because the Board of Directors has the power to fire them. IPO functions after being fired will be affected.