An IPO is another type of investment that is offered to investors in the stock market. But what is an IPO, exactly? An IPO or in simpler terms an Initial Public Offering is a process by which a private company could go public by selling its stocks to the general investors. It could be a new, young company or an old one which wants to be present on the stock exchange.
One of the main reasons for a company to start an IPO is to raise equity. The desired equity is raised by the sale of stocks to the general investors or the existing shareholders can sell their shares to the public without raising new capital for the same.
Although, after a company offers its shares to the public investors it is not obliged to repay the capital to public investors. The company offering its shares are known as issuers. They do so with the help of investment banks. After an IPO, the company’s shares are traded in the market. These shares can then be sold by investors through secondary market trading.
Different Types of IPOs
The different types of IPOs that are offered are,
This is the most common mechanism in most countries. The investment banks also known as underwriters receive indications of interest from institutional investors and build a book of these non-binding orders based on the demand. They then go on to set the price and allocate shares to these investors.
Fixed price offer
The investment banks set the price and the shares are then allocated based on a pre-specified rule. For example, investors can subscribe for shares at the fixed price and if the demand exceeds the amount of shares present, the shares are then rationed out.
In an auction IPO, investors submit their bids along with the price and quantity. The price is then set at the market clearing level or below it. If the price is set below the clearance price, rationing of the shares takes place.
In some cases, IPOs may involve a combination of all the mechanisms mentioned above.
With these different IPOs, you get plenty of information to base your decision.