Basics of an IPO

By admin
Feb 3rd, 2012
1 Comment
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Basics of an IPOThe first question as you might ask.
What is an IPO?
An IPO, Initial Public Offering, is when a company goes public. It is the process through which a private company offers its shares for sale to the investing public for the first time.
Going public is not a straight forward process. Not any company can issue an IPO to the market. Before going public a company has to comply with the rules of the regulators, e.g. SEBI, Securities and Exchange Board of India, and get listed on an Exchange, e.g. BSE, Bombay Stock Exchange, which in turn has different requirements to be met.
The exchanges around the world set different requirements for a company to get listed. Some exchanges set a rigorous list of requirements. The list of requirements for different exchanges differentiate on the basis of certain points like
  • Pre-tax income of a company
  • Net tangible assets
  • Share price
These are just a few of the parameters, which are very much self explanatory, among many others.

NYSE, New York Stock Exchange is considered to be the most stringent of an exchange. While NASDAQ, National Association of Securities Dealers Automated Quotations, another exchange in US, sets more flexible requirements for the companies. Hence small companies and start ups which do not meet the requirements of NYSE opt to get listed on NASDAQ. A point worth noting here is that NYSE is a physical exchange while NASDAQ is an electronic exchange.

Now why would a company issue an IPO? One line answer is to get money. 🙂
Well, let’s look at it in some details.
When a private company needs additional capital to grow or to expand, it has many options like:
  • Borrowing loan from the bank
  • Selling bonds i.e. creating debt (Don’t worry if you are not clear on this, we will cover bonds in the posts to come)
  • Selling equity/shares to the investors
Now there are always two sides of a coin, unless it comes from a popular Bollywood flick ‘Sholey’. 🙂
So now we will list out some of the advantages and disadvantages of issuing an IPO.
Advantages of an IPO:
  • Raising cash by selling equity is cheaper than borrowing loan from a bank or creating a debt.
  • The stock price may well rise above the initial level when it is trading in the secondary market.
  • A very large sum of money can be raised through an IPO. We will look at some biggest IPOs after this discussion of the pros and cons.
  • After an IPO a company becomes well known and if the stock price appreciates, the company gains good credibility which makes further fund raising a little easier.
Disadvantages of an IPO:
  • Stock prices might fall in the secondary market.
  • The 100 % ownership of the company is diluted and some of it is then in the hands of investors.
  • Issuing an IPO itself incurs cost. We will discuss it in details once we get to the process through which an IPO is issued in the coming posts.
  • The company to woo the investors has to share with them some vital information like finances of their company, which it otherwise would not, as the competitors can take benefit from such an information.
In the end let’s just end the post with a list of 5 biggest ever IPOs in the world, in terms of capital they managed to raise.
S.No.CompanyDateCapital Raised
5Deutsche Telekom AG,
German telecom giant
17-11-1996$12.48 bn
4Enel SpA,
Europe’s leading energy providers
02-11-1999$16.58 bn
3Visa,
American credit card
18-03-2008$17.9 bn
2NTT Mobile,
Japanese wireless phones
12-10-1998$18.4 bn

And the biggest IPO ever is

1Industrial and Commercial
Bank of China
20-10-2006$19.1 bn
In our next post we will see the process that is followed when an IPO is issued. Hoping the above information was helpful and interesting.

One Response to “Basics of an IPO”

  1. […] Let’s talk about the process though which a private company issues an IPO.If you want to brush up your knowledge on the basics of an IPO, you can follow the link. We […]

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