IPO Full Form and Its Importance in the Stock Market

If you have just begun investing in stocks and you do not know what the full form of IPO is and what it means, you should not worry. “IPO” stands for “initial public offering.”

When a private company approaches the public for investment for the first time, it is called an IPO. Mostly, the funds raised through an IPO are used for the growth and expansion of a company.

Now, let us talk about why IPOs are important for the stock market.

1. IPOs help companies raise capital: Imagine a company with great potential to grow, but it cannot approach the public for funds. What can it do to expand or grow? Either its owners have to invest more funds or it has to approach lenders for a loan or it can go to people or institutions in its network for equity investments. It may or may not be able to raise funds in this manner. Enter IPOs, which allow companies to raise funds from the general public that can be used for growth and expansion.
2. Helps people invest in companies: If a high-performing company remains private, then an average investor will not be able to participate in its growth. However, if it goes public through an IPO, even an average investor can benefit from its growth.
3. Results in better transparency: When a company goes for an IPO, it has to comply with stringent rules and regulations pertaining to the reporting of its financials. Besides, it has to adhere to high standards of corporate governance and make several disclosures. These measures result in better transparency about such a company than would have been possible if it had remained private.
4. Increases overall liquidity in the market: When a stock market witnesses a number of successful IPOs, it helps bring more retail investors to the market. This improves the overall liquidity in a stock market. It also improves the confidence of various kinds of investors in a market. Hence, successful IPOs are extremely important for the overall health of a stock market.
5. Allows early investors to exit: An IPO allows early-stage investors, such as venture capitalists, private equity firms, or founders, to exit from a company by selling their stake. Through an IPO, they can earn a significant return on their investment.

Having understood the importance of IPOs in the market, let us now talk about the IPO types. There are predominantly two types of IPOs: Fixed Price Offerings and Book Building Offerings.

1. Fixed Price Offerings: When a company says that its IPO can be subscribed at a fixed price by people, it is called a fixed price offering. In such a case, a company identifies a fixed price before opening its IPO for subscription. To apply for such an IPO, investors have to pay the full share price.
2. Book Building Offerings: In this case, a company provides a price range for an IPO. Investors keen to subscribe have to place a bid at a price falling within the range. Based on the bids received, a company determines the cut-off or issue price of an IPO. 

Conclusion

Having learnt what the full form of IPO is, the importance of IPOs in the stock market, and IPO types, it is important to appreciate that while IPOs can be great for retail investors to make money, not all IPOs are meant for all kinds of investors.

Therefore, before subscribing to an IPO, you should carefully examine its financials, future prospects, and other factors. You should subscribe to an IPO only if it makes sense to you.

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