What are upcoming stock markets in India
Initial Public Offering (IPO)
What is Initial Public Offering (IPO)?
What is IPO? The definition of IPO is as follows: an Initial Public Offering, also known as an IPO or initial public offering, is the first public offering of shares by a private organization on a stock exchange.
In an IPO, the capital-raising company, often referred to as the issuer, turns to investment banks or lending companies for help in determining the type of security, the number of shares and their prices, and the timeframe for the market offering.
All individual questions regarding the proposed offer will be disclosed to potential buyers in the form of a document called a securities prospectus. After the IPO, the shares freely traded on the open market are considered to be free float.
While there are many benefits to going public, it also comes with significant costs, largely because of the IPO process itself (e.g., legal and banking fees). In addition, not all companies are willing to comply with ongoing requirements and disclose important and often confidential information, including financial and accounting data.
Where did you hear about an initial public offering?
When you talk about a company's IPO in the news, you mean an initial public offering. Investors and traders usually talk about an upcoming IPO of a company and discuss whether investors should buy its shares.
Everything you need to know about an initial public offering
Now you understand the IPO definition and we can take a closer look at it.
The first IPO took place much earlier than you might think, even before the first stock exchange was established in 1779. The Dutch East India Company was founded in 1602 to protect the Dutch government's trade routes and to establish a trading monopoly in the Indian Ocean. To finance their trips, they sold the company's shares to several investors. The company paid annual dividends between 12 and 63% to its shareholders. This was the guiding principle of the first modern IPO. In modern times, IPOs have become a popular instrument for investors and entrepreneurs to raise capital and maintain their market presence.
Prior to going public, the company is viewed as private, with a relatively small number of shareholders from early investment, including founders and professional investors, such as corporate angels and venture capitalists.
The term “public” refers to all others, including institutional and private investors, who are interested in purchasing shares. Until the company has listed its stocks on a stock exchange, the public cannot invest in them.
Listing on a major stock exchange brings the company a lot of fame and prestige. Historically, only companies with proven earnings potential and sound fundamentals were allowed to qualify for an IPO, and yet it was not easy for them to get their stocks listed. Nowadays, with a multitude of exchanges and increasing competition, listing requirements have become a little more relaxed.
As a rule, most private companies are small to medium-sized. Still, there are some world-famous giants that are not public. Good examples of this are EY, IKEA, Mars Candy, Deloitte, Reyes Holdings, Hallmark Cards and Publix Supermarkets.
However, privately owned companies have some advantages that are usually lost after going public. An owner of the private company is not required to disclose information about financial and business matters.
Public companies, on the other hand, are subject to strict regulations by the national authorities. You have hundreds or thousands of shareholders and you need to form a board of directors. All financial and accounting data must be reported on a quarterly basis. In the US, public companies must file the report with the Securities and Exchange Commission, or SEC for short. In other countries they are usually monitored by an administrative body similar to the SEC. In addition, public companies must meet the requirements and regulations of the stock exchange on which their shares are listed.
An IPO brings a large amount of much-needed capital to the company. Growing companies in need of funding often use IPOs to raise money for their development and expansion. Other more established companies may use IPOs as an opportunity for their shareholders to abandon their stake in the company by publicly selling the shares.
Some companies launch an IPO for the prestige and credibility reasons that come with it.
An initial public offering is a great way for investors to diversify their investment portfolios and participate in value-adding entrepreneurship. When a new company goes public, many investors and traders enjoy the chance to make more money overnight if the stock rises.
Until 2009, the US was the leading issuer of IPOs in terms of total value. Since then, China has been the leading emitter through the Shenzhen, Shanghai and Hong Kong stock exchanges, reaching $ 73 billion by the end of November 2011. In 2011, the Hong Kong Stock Exchange generated around $ 30.9 billion as a top stock for the third year in a row. India is also emerging as the leading IPO market in the world: in 2017 there were 153 IPOs in the Indian stock market, grossing $ 11.6 billion. In 2018, the Hong Kong Stock Exchange regained its IPO crown: it listed 125 companies and raised over $ 36.5 billion. In the same year, the New York Stock Exchange had 64 IPOs and raised $ 28.9 billion, accounting for 13.9% of the global IPO market.
To learn more about Initial Public Offering, take the free online course from Capital.com.
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