If you’re a novice in the world of finance, first of all, welcome! As you embark on your trading journey, one of the crucial decisions you’ll face is whether to invest in an IPO (Initial Public Offering) or an FPO (Follow-on Public Offering). But what exactly do they mean and why do companies issue IPOs? Let’s demystify these terms and help you make an informed choice with the guidance of investment banks in India.
Understanding IPO And FPO
Before we dive into the journey of the equity capital markets and how investment banks help their investors with trading, let’s understand IPO and FPO in simple terms.
IPO (Initial Public Offering)
An IPO is when a private company decides to go public by offering its shares to the general public for the first time. It’s like inviting you to become a shareholder in the company. The company that offers their shares is called an ‘issuer’. The investment banks guide these companies to go public in order to raise capital for their businesses.
FPO (Follow-On Public Offering)
On the other hand, an FPO occurs when a company that is already listed on the stock exchange decides to issue additional shares to the public. So, once a company goes through an IPO and makes its shares public, it then can issue an FPO to further raise capital. In other words, IPO is the first issue while the FPO is the further issue. This is a way for the company to expand its equity base, reduce the existing debts if any, and raise capital.
Investment Banks In India – Your Guiding Stars
Investment banks in India play a pivotal role in both IPOs and FPOs. They act as financial advisors and underwriters, helping companies navigate the complex process of raising capital in the equity markets.
Here’s how they assist:
Investment banks provide valuable insights and recommendations to companies looking to go public. They assess the company’s financial health, market conditions, and investor sentiment to determine the right time and price for the offering. Investment banks extensively research all the companies listed on the equity capital market, look for IPO and FPO offers, and recommend profitable investments to their clients.
When a company decides to issue new shares, investment banks in India often underwrite the offering. This means they guarantee to buy any unsold shares, reducing the risk for investors.
There are different types of underwriting that investment banks promise their investors.
Firm Commitment Basis– It’s the most common type of underwriting where the investment banks buy the entire issue from the issuer at a given price.
Best Effort Basis – It’s where the investment banks are legally obliged to help their investors sell their shares. But if the shares are left unsold, they don’t need to buy them, they can return them to the original investors.
Now that you know the roles of investment banks, let’s explore the pros and cons of IPOs and FPOs:
IPO – Pros And Cons
Potential For High Returns: Investing in an IPO can be lucrative. Early investors may benefit from significant price appreciation if the company performs well in the stock market.
Access To Exciting Startups: IPOs often involve innovative and high-growth companies, allowing you to be part of their journey from the beginning.
Higher Risk: IPOs are riskier than established stocks. New companies may lack a track record, making it difficult to assess their long-term potential.
Limited Information: Companies going public might not disclose as much financial information as established ones, making due diligence more challenging.
FPO – Pros And Cons
Stability: Companies issuing FPOs are usually more stable and have a proven track record. This can provide a sense of security for investors.
Dividend Income: Many established companies pay dividends, providing you with regular income in addition to potential capital gains.
Lower Growth Potential: FPOs may offer slower growth potential compared to IPOs. You might not see rapid price increases.
Competing With Existing Shareholders: In an FPO, you’ll be buying shares alongside existing shareholders, which can impact the stock’s price dynamics.
Choosing Your Path With The Investment Banks
Now that you’re armed with knowledge about IPOs and FPOs, how do you choose the right path?
1. Risk Tolerance And Stability
Once you enter the world of trading, you need to be mindful of the potential risks before investing. When companies are investing in the equity capital markets, investment banks help them understand the risks, and recommend them some good investment options. Because of their expertise in the financial market, they help investment banks in making a diverse and stable portfolio. If you’re comfortable with higher risk and seeking potentially greater profits, you should consider investing in an IPO.
2. Equity Research And Analysis
Depending on the requirements of the investors, investment banks help them in smart investing. With the help of visual charts and data analytics, they draw patterns for almost all the listed companies and recommend profitable investment options to their client. The aim is to mitigate risk and earn long-term gains.
3. Market Analysis
Investment banks in India keep a close eye on market trends and provide valuable insights that significantly improve the strategic decisions of investors and keep them ahead of their competing companies. They even have a vast network from startups to huge businesses which help the investors distribute their securities and enable them to raise funds.
Investing in IPOs and FPOs can be a rewarding journey in the equity capital markets. Remember that each path comes with its own set of risks and rewards. It’s crucial to assess your risk tolerance, research diligently, and consult experts to make informed investment choices.
Whether you choose the excitement of an IPO or the stability of an FPO, investment banks in India will be there to guide you through the process. So, take your time, learn, and enjoy your trading journey.
Whether you’re a start-up looking to scale your operations or an established company seeking to enter new markets, debt can be the catalyst for your ambitions.