October 30, 2020

Advantages and Disadvantages of Going Public Using an IPO

92d2d1656ded what is an ipo

92d2d1656ded what is an ipo

IPO definition

Initial Public Offering (IPO) is the process of going public with the first issue of shares by a company. A private company changes its status by issuing its shares to the public for the first time. Stockholders own a part of the company’s ownership. Before IPO, a company’s ownership is private-owned.

IPO brings financial benefits with raised capital. The funds can be used for further expansion of a company, R&D works or paying off existing debt.

The IPO is advantageous for companies but the going public has some drawbacks also. Companies consider various aspects before issuing an IPO – the ability to bear the cost of generating financial and legal reporting documents, underwriters’ commissions, committees and other ongoing costs associated with public company compliance obligations.

Advantages of IPOs

  1. Opportunity for Massive Expansion: The obvious advantage of IPO is to have a lot more capital for further expansion of a company. It can continue to grow with new capital equipment and infrastructure by using the raised funds.
  1. Popularity with increased public awareness: An IPO makes a company popular. It works as a strategy and leads to increased sales as their products are known to a new group of potential customers.
  1. IPO as an Exit Strategy: Many investors and traders use IPOs as an exit strategy. An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO).

Disadvantages of IPOs

  1. A Hefty fee of underwriters: An IPO process is complex and guided by investment banks and underwriters. Obviously, they will charge a heavy fee for complexities in the task.
  1. Disclosure to investors. A lot of valuable information about a business and its owners become public such as periodic financial reporting. Competitors can take advantage of such information.
  1. Cost of fulfilling regulatory requirements: The company has to publish periodic financial reporting to show its true financial health to its shareholders. The cost incurred is very high.

How to invest in an IPO online?

If you wish to invest in an IPO online, you will need a Demat cum trading account. Following are the steps to invest in an IPO:

  1. Choose the IPO to invest in – Keep an eye on the financial market closely to know about the fresh issues of a company.
  2. Open the required accounts – A bank account, Demat account, Trading account.
  3. Funding – If you have enough lump sum to invest that’s good, if not then there are various banks and NBFCs to lend money.
  4. The application process: It includes further steps – the bidding and the allotment. Usually, you will be allotted lesser shares than applied because, in most IPOs, the demand is much higher than the number of shares issued. Once you will be allotted shares, your Demat will hold your shares.

Benefits of Demat Account

  1. An easy and convenient way to hold all your securities in electronic form.
  2. Quick & easy access to your investments.
  3. Easy Dematerialisation of securities.
  4. Safer than the physical form of share certificates.
  5. Faster money credit at the time of trading shares.
  6. Loan against securities available in your Demat Account and various others.