Cash is the most integral part of operating any business activity. When we start a venture then we need the cash for initial capital investments and later we require the funds to expand and scale it. However, a company can utilize its savings and revenues to invest but what about growing a business and achieving the expansion goal? As expanding the business requires a higher amount of investment in infrastructure, resources and acquiring new business. With this you should also know about factors to check before you invest in an IPO as it helps in providing better returns.
So if you are also planning for business expansion then the first alternative for you is bank financing. Although the companies feel that the bank loan is a critical process it requires some collateral and is limited to a certain amount. Therefore the second and most largely used way for companies to raise capital for future investments is an initial public offering (IPO).
What is Initial Public Offering?
In simple words when a company sells its shares for the first time in public then this process is known as an IPO. The shares held by the business executives of the company are offered to the general public for purchase in exchange for funds. Once the IPO process is completed then the company is transformed into a publicly listed company and its shares are liable to be traded in the open market. So when a company becomes publicly listed then its ownership is sold to the investors. The IPO is initiated for the following purposes:
To raise the Fresh Equity Capital
To facilitate the trading of assets
To monetize the investments for its private stakeholders
Fresh Issue in IPO
As the name states the fresh issue is the process where the company issues the new shares to the general public and sells them. Suppose a company has 100 shares and a profit of 1000$, the company’s EPS (Earning per Share) is 10$ (1000/100). Now the company has the desire to raise 50$ through IPO by issuing 5 shares at the rate of 10$ each. So because of new shares, the EPS will be 9.52 (1000/105) as the number of shares has increased by five and the total number of shares is now 105. Hence, this is the way the fresh issue works.
Offer for Sale in IPO
As far as an offer for sale is considered in it the company sells the shares held by existing promoters or investors of the company. Let's understand with an example, suppose a company ABC is holding a stake of 80% in another company PQR and wants to sell 30% of its stake to the general public. In this case, the company may issue an offer for sale of just 30% of the stake. So the funds raised through this offer for-sale method are used by the investors or promoters for selling the shares and not by the company.
How to Analyze the IPO?
Analyzing the initial public offering is a wise task. Some companies open the IPO at discount and some at a premium. The professional investors provide a complete guide about it and ensure that the company is strong or good for investing. You can take the help of some tools to analyze the IPO, these are as follows:
You need to know the purpose of the IPO. For this, you can check the Red Herring Prospectus of a company. As the RHP held the information about how the company will use the funds raised through IPO. If it is for expansion purposes then you can invest in it without any fear or risk of loss of money but if it is for paying the debts then you should think thoroughly before IPO investments. Several IPOs are doing well, you can get an insight about IPOs with the highest listing gains as it can guide you properly.
For every IPO the news is always updated on the news channels and social media platforms, so you can get an insight into its status. If the IPO is not subscribed then you can assume that the initial public offering is unworthy and unsuitable for investment. On the other hand, if you notice that many people are making the decision to invest in it, then you may consider doing the same.
To understand the IPO strategy you should check and focus on the future perspective of the IPO. So one of the most significant factors to analyze the IPO is the plans of the company. You should ensure that the company has plans to utilize the profits to expand the business with its competitors for new products and services.
Well, here you have to check the financial status of the company. For instance, you can examine the entity's financial statements from the last five years. With this, you should also ensure that the company should not have any debts to pay off. So if you find the company financially sound and profitable then only you should go ahead to invest in the IPO.
Thus these are some simple steps that can assist you in determining the status of the company. Apart from this, you need to open a Demat and Trading account. These accounts are essential for trading in the stocks and IPOs of the companies. After opening the account you can invest in the IPO by using the online mode or trade terminal. Your access to the online facility allows you to complete the process quickly and with little effort. Well, many tech IPOs are taking place in the technological companies, you can invest in them also.
Besides this, you can also get insights about the IPO investments through news and updates on the commercial sites. As digital technology has made it quick to invest in shares and securities.
An initial Public Offering is a huge step for a private entity to transform itself into a public company. With this, it is a convenient mode to raise capital through the market. By issuing the initial public offering the companies split the ownerships also. As the share subscribers in the IPO become the owners of the company. Well, IPO investments are for business expansions and usually provide better results. The given information can help you in analyzing the IPO and giving your input on it.
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