What does it mean to an investor?
Initial public offerings happen when a private limited company allows public access to its stocks. The stocks of the company are available for trade in the stock market. The private limited companies aiming for further expansion or diversification are the ones that go in for IPO’s. Individual investors would not hesitate to invest in these shares as these companies would already have a proven financial record. Investors would not have to deal with the price comparison while buying these shares.
What changes happen to the entity when it goes public?
There is a long list of regulations and legal formalities a company has to go through prior to it going public.
They are required to publish the prospectus of the company detailing its business and the industry it operates in, the previous years’ financial statements and also the pricing of the stocks.
Once the company goes public, there is a dilution of ownership from the point of view of the board. The management has lesser control over the decisions of the company.
The company would be subject to more regulations as it has to publish its financial statements year on year. There would be periodic audits from the authorities concerned. They would also have periodic filings to be furnished with the exchange boards.
The process of a company going public is lengthy and time-consuming. It requires a lot of time and effort from the management. The company also incurs huge expenses which may or may not be offset by the benefits of going public.
The companies going public will get additional capital which can be used for further growth and expansion.
Their stocks will get a ready market which will increase the liquidity of the stocks in future. More investors prefer stocks which can be converted to liquid cash immediately.
The fact the company going public will provide more visibility to the entity. More people and institutions would come forward to invest.
How is an investor supposed to approach an IPO?
The investor has to go through all the publicly available information about the company. He has to do a thorough study of the financial statements and prospectus to understand the investment patterns of the company and also understand their past performance. These should be available on websites. The investor can apply through a broker either online or in the paper.
Once the shares are listed and allotted to him, he can buy or sell them through his account.