An initial public offering, or IPO, is the first sale of shares issued by any company to the general public. Before an IPO the company operates privately, with smaller number of shareholders that are mainly early stage investors (including founders, families of the founders and their associates) and/or professional investors (including angel investors and VC’s). The public primarily includes everybody else like any individual or institutional investor who wasn’t previously involved in the early days of the company and someone who is interested in purchasing shares of the firm.
ETill the time the shares of a company are not offered through an IPO the general public cannot purchase its shares. However, one can approach the owners of a private firm regarding investing, though they're not obligated to sell you any shares. Whereas public companies have to sell at least some amount of their shares to the public and to be traded on a stock exchange. This this is the reason why people often refer to an IPO as ‘Going Public’
So now that we have made it clear what an IPO is let’s jump into why one should invest in it:
1. Transparency: When a company goes public it has to release all its financials and fundamentals to the public, which makes it more transparent and easier for investors to analyse and evaluate the company as compared to when it was private and was not obligated to reveal any information to the public.
2. Low Prices : IPO’s are heavily evaluated by industry professionals and individual investors which makes it easier for the market to judge if an IPO is overpriced. In order to avoid a low subscription towards the IPO, companies try to make sure that their valuations are appropriate and efficient. This makes the share price stay closer to the actual fundamental value of the share and is beneficial for the investor.
3. Get in early : An IPO is when a company is opening its doors to the public and many times the IPO is a great chance to get into the company at a good valuation. For new companies in a high growth industry IPO’s can offer abnormal returns to the investors.
4. Easy to invest : It is extremely easy to invest in an IPO, all you have to do if you have a demat account is login to your net banking and apply through ASBA (Applications Supported by Blocked Amount), which takes less than 2 minutes of your time.
To conclude, IPO’s are a great way to get into the capital market action in an easy and less risky way. Due to the fact that IPO’s are so heavily evaluated, new investors can make decisions just by reading reports online published by investment professionals and financial institutions.
To know more about IPO’s and how to invest in them please visit begininvest.com