IPO is a special kind of shares people invest regularly other than investing in already listed stocks. Every investor or anyone else interested in day-to-day stock market activities is always not aware of all the things happening in the background of the market. Many a time, investors and traders accept market instruments and activities on their face values. But it is sometimes necessary to know the background of the instruments you are trying to invest in.
In this article, we are going to discuss the differences between IPOs and regular stock investments. Investors and traders mostly know about regular stock investment, I presume. Hence, in this article, I would like to focus on the IPOs, their pros and cons and regular stock investments and the major difference between these two different types of investments.
What is an IPO?
IPO stands for Initial Public Offering. A company gets access to raise capital through IPOs. Through the raised capital a company infuse capital for necessary growth.
An already listed company is allowed by SEBI to raise capital through IPO when it reaches a certain stage of growth. Typically, when a company’s private valuation reaches $1 billion, it is allowed to raise capital through IPO. But if a company has strong fundamentals, good cash reserve and good profitability potential, SEBI may allow it to go public.
Before IPO, a company applies to SEBI to go public. A privately owned company is allowed to go public when it fulfils the minimum eligibility criteria for raising money from the market. Once allowed, the company advertises for the IPO and invites investors to invest in the company.
Prices of equity shares available for the public depend on company fundamentals and business model. There is a fixed date for opening the IPO. And there is a closing date after a few days. It is usually 3 to 4 days or a little more. After the IPO is closed, it takes a while to allot the shares to the investors. And after a few days, the IPO opens on the prementioned day, which is known as the listing day.
A price range is given during application for each share of IPO. The minimum and maximum prices are given within which the price is settled before the listing day.
An institutional investor or a retail investor gets the shares on the basis of the invested amount.
Regular stock investments
A regular stock investment, on the other hand, is buying or investing in a stock at the market-defined price. Investors or traders pick stocks from the market of their choice and sell them whenever necessary. The price is decided by the buyers and sellers at the time of the transaction. It can be above the fair value or below the fair value depending on the market. When a share is bought from the market, generally the shares are not available at the face value.
We now would like to pen the difference between these two types of investments. Let us look at the differences in every aspect starting right from definitions.
Differences between IPO and regular stock investments
Definition – IPO is the first issue of shares of a private company to the common public. Through IPO a company can enlist to the stock exchange and become a publicly owned company instead of a privately owned company. Before the issuance of IPO, the company first attains a higher status in the business community. Most of the start-ups and other new companies during their stage of expansion want to attain this height and get recognition among the global business community.
Investment in regular stocks could be buying from the market or buying shares from FPO. These companies are already listed entities and their shares are available in the market for trading. One can buy these shares from the market through any of the exchanges. And there are FPOs. FPO means Follow- up Public Offer. It is the issuance of more shares by the directors of a company that is already listed in the market. There is another kind of share listing. They are called DPO or Direct Public Offering. Companies offering DPOs do not follow the route of IPO and directly offer their shares to the public. All the middlemen crowding in the IPO are avoided in DPO and companies directly offer their shares to the public through the exchanges.
Types – IPO, DPO and FPO – Investors can directly buy shares through IPO, DPO, and FPO as fresh offers from companies or buy shares through brokers from the exchange.
Price – IPO, DPO and FPO are differently priced. During an IPO issue, the company either issues the share at a fixed price or through a book-building process. In the book-building process, a price range is given during IPO. Later the issuing company decides on which shares are to be listed, but the issuing price must lie within the declared price band. DPOs and FPOs are usually fixed-priced shares, but there are exceptions.
DPOs and FPOs are not sold at the rate of IPO price. IPOs are the shares offered by the company at fair value or at the face value. But the other kinds are value-added types and are driven by market demand. The company can not solely decide on the price.
Objectives – IPOs are issued with the objective to add companies’ worth and increase business. The others are issued to meet immediate and future fund requirements.
Profitability – It is generally considered that the IPOs are more profitable than the other two.
Risk factor – IPOs are riskier because the market knows little about the new company. DPOs and FPOs ate issued by an already known listed company and hence there is minimum risk involved.
Issuer – For an unlisted company which is issuing IPO, people have little or no knowledge but the market knows about the companies issuing FPOs and DPOs.
Conclusion – We can conclude that IPO investment is riskier but the return is high and are less expensive because the stocks are allotted at the lowest possible price as per the issuing company. The other kinds of shares are costlier and less risky.