When it concerns investing, the terms IPO and FPO are two critical terms that each investor should understand before investing.
It is well acknowledged that cash is required to do business, major or minor. Funding may be needed for working capital demands or to sustain operations in the case of corporations and larger organizations. Companies can either choose the debt or equity path to obtain new cash. Companies sell their shares to raise cash via equity.
The primary ideas that firms employ for their purposes to obtain funds from the equities market are IPO (Initial Public Offering) and FPO (Follow on Public Offer).
Each newcomer interested in investing in an initial public offering (IPO) should have a basic understanding of these stock market basics.
This essay will explain the differences between IPO and FPO in great depth.
What is “IPO”?
The term “IPO” relates to the procedure through which a private firm becomes public for the first time by releasing shareholdings to the public.
An “issuer” is a firm that sells its stock to the public, and it does it with the help of many investment banks. When the firm’s stocks are listed on an open market, the IPO is completed.
A private company’s principal motivation for going public is to secure funding. The corporation can gather and generate capital to build its business by selling its shares on the open market.
Types of “IPO”
There are two different types of IPO:
- Fixed Price Issue:
The corporation sets a guaranteed price for all its shareholdings and announces it as a fixed price issue in the offer document.
In this sort of IPO, all investors know the firm’s cost of a particular share before it goes public. So they spend the full set price when they subscribe to a particular company’s IPO.
- Book Building Issue:
Because of the book-building issue, the firm does not have a set pricing but price bands. The price is only found when an investor’s demand has been generated and recorded.
What is “FPO”?
The term “follow on public offer” refers to a procedure in which a firm already has listed on the stock exchange issues shares to current shareholders or new investors.
The firm is undertaking an FPO to increase its stock base. The firm employs FPO only after it has begun launching an initial public offering (IPO) to make its shares accessible to the public and obtain funds for its operations.
FPO stands for “further issue,” whereas IPO stands for “first issue.” The FPO is raised with two goals in mind:
- To get a company’s debt down to a manageable level.
- Obtaining more financing for a business
Types of “FPO”?
There are two types of FPO
- Dilutive FPO:
The corporation issues an extra amount of shares in dilutive FPO, while the valuation of the company’s share stays unchanged. This lowers the share price while also lowering earnings per share.
- Non-Dilutive FPO:
The term “non-dilutive FPO” refers to when a company’s private shares are sold on the market. This strategy raises the number of shares accessible to investors while leaving the same number of shares accessible to the corporation.
Differences between IPO and FPO
Three significant differences between IPO and FPO will assist you in comprehending the distinctions.
- IPO vs. FPO – Aim
An IPO‘s goal is to raise funds from investors by releasing shares to the public to build and enhance a company’s performance.
After a firm has completed its IPO and expanded its business, this might require extra capital when FPOs are issued.
A company’s principal goal in issuing FPO is to increase its equity base. On the other hand, FPO can be utilized to diminish a promoter’s shareholdings.
- Performance of IPO vs. FPO
FPO and IPO performances vary markedly since it indicates how many insights an investor has around a firm before purchasing authorized shares.
Investors must read the red herring prospectus during an IPO, which is a preliminary document prepared by a firm.
They have no significant experience or record with the firm in which they are engaging. As a result, they form an opinion about whether to contribute to an IPO based on management debt on the accounts, market interest, and other factors.
In an FPO, investors have access to all relevant info about a firm, as well as a record of consumer interest and success following an IPO. On the other hand, investors get a clue from the sale of equity holdings if the shares are wise to invest in or not.
- IPO vs. FPO: Which Is More Profitable?
Since investors participate in the firm’s seedling stage, IPOs can provide more significant returns and be lucrative than FPOs.
Because the investor has access to critical data regarding the firm, FPOs are less risky than IPOs.
Another advantage is that investors may examine a company’s historical success and make educated guesses about its future development before investing.
Because the firm is still in the stabilization period, FPOs are less rewarding than IPOs.
In the end, an IPO implies that the company’s shares are accessible to the public. On the other hand, FPO refers to the first-time issuance of shares listed on the stock market to current shareholders or new investors.
These distinctions will help you see the big picture of investing and keep you on the course since they are the first 2 essential principles that any novice stock investor should master.