Initial Public Offering (IPO) is the first issue of shares by a company to the public for raising funds. A company may need to raise money from the public for various reasons such as raising funds for new projects, expansion of existing capacities, repayment of high cost debt, divesting part of promoter holding in company, etc. Investing in equity shares of these companies is termed as IPO investment. There are certain inherent advantages when it comes to investing in IPO’s for investors.

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How does an IPO take place?

• When a company wants to go public, the first thing it does is hire a financial advisor or an investment bank to manage the public issue.

• The company and the investment bank meet to discuss the amount of money the company would raise, the type of securities to be issued, and all details in the underwriting agreement

• The underwriter puts together what is known as the RED HERRING prospectus.

• This is an initial prospectus containing all the information about the company except for the offer price and the effective date not known at that time.

• With the red herring in hand, the underwriter and company attempt to find the appetite for shares. They go on a road show to tap institutional investors.

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Why do companies go for an IPO or become public?

• An IPO raises capital for the company.

• It dilutes equity holdings of founders and investors and brings public investors.

• It gives capital to companies for expansion.

• It is a moment of pride for the company as it boosts corporate image.