Initail public offering

Definition



is a method to raise funds by a company which has been so far privately owned but now wants to offer its shares to the general public throughthe share market.




What Type of Companies do it?



Usually companies which have made a fair bit of progress and want to get to the next level adopt this method.




Advantage
It allows the company to reach a largepool of investors to acquire a substantal amount of money to finance its upcoming projects.

Disadvantage
The existing shareholders have to dilute their shares in order to accommodate the investor's share in the hope that additional capital and resultant boost in the company's performance will enhance the value of company's share.


How is it different from the normal share trading?



It is the first step of the company in going public..ie raising funds through the general public.

IPO

Share/ Secondary Market

The funds go directly from the share buyer to the company

money just exchanges hands between various investors in the market.







This is one reason why the IPO market is also referred to as the Primary Market.

The company is not obliged to repay the capital, but the investor has a right to future profits distributed by the company and the right to a capital distribution in case of a dissolution.

How it is done?
the companies cannot directly enter the market and offer shares to the public.
For this they need an underwriter.



Underwriters



The job of the underwriter is to determine the form, priceand structure for the IPO.
he works on a commission basis, based on a percentage of the value of the shares sold.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in thestock, but high enough to raise an adequate amount of capital for the company.
The process of determining an optimal price usually involves the underwriters arranging share purchase commitments from leading institutional investors (insurance companies, mutual funds etc.)

by mrunal