Initial investors often come across terms like IPO and FPO. Before investing in the stock market, an understanding of these two terms are very important. These are the fundamental concepts of the sock market which shall be covered in this article.
An initial public offering, or IPO, is the decision made by a business to declare/ Sell its shares to the public for the first time. In the financial markets, “going public” refers to a company’s decision to prepare it for listing on the majority of the nation’s stock exchanges. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are our two exchanges. FPO or Follow-on Public Offering is a process in which a company that is already listed on an exchange issues fresh shares to investors or current owners, typically the promoters. Companies employ FPO to diversify their equity bases.
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What are the types of IPOs?
There are two types of IPOs that are followed in the stock market:
- Fixed Price IPO: In this process, the price of the shares is fixed by the company and is not altered throughout the bidding.
- Book Building IPO: In this process, the share prices are issued within a price range and are altered depending upon the demand and the bidding.
To know more information about IPOs, check out Upcoming IPO Lists as well as the IPO Grey Market Premium.
What are the types of FPO?
There are two types of FPO:
- Dilutive FPO: On a dilutive FPO, the company issues new shares on the market for the public to acquire, but the company’s value remains unchanged. This lowers share prices and, by extension, earnings per share.
- Non-dilutive FPO: Non-dilutive FPO occurs when the company’s major shareholders, such as the board of directors or founders, sell their privately held shares on the market. This strategy does not increase the company’s share count; rather, it increases the number of shares available to the public. Unlike dilutive FPO, this strategy has no effect on the company’s EPS because it does not change the number of shares.
What to choose: IPO vs FPO
Given below is a table differentiating between IPO and FPO. This is a comparison of the two so that investors can choose what is best for themselves
Subject | IPO (Initial Public Offering) | FPO (Follow-on Public Offering) |
Definition | A company offers its shares to the public for the first time. | Issuing extra shares after the company has already gone public. |
Purpose | To raise capital, expand, and become publicly traded, along with registration with NSE/BSE. | To raise additional funds, typically for expansion or debt reduction. |
Investor Base | Attracts new investors during the public debut. | Targets existing investors and new ones familiar with the company. |
Risk | Higher due to the lack of market history and past performance. | Comparatively lower, backed by the company’s established market presence. |
Conclusion
IPOs and FPOs are important tools for companies to access public capital markets, with each having a specific function. IPO and FPO both are the best for investment. You can get help of WealthAI before investing in any IPO or FPO. An IPO is a corporation’s first entry into public trading, with the goal of raising new cash, whereas an FPO is a follow-up effort by an existing public company to secure further funding. Understanding their key distinctions, as emphasized in the comparison analysis, is critical for both investors and businesses seeking to navigate the dynamics of stock market financing effectivel.