IPOs Are Great Investments
Initial Public Offering (IPO) is when a private company owner lists his company on the market for the very first time. It can be an exciting offer as you get to invest your money in a new idea and get the shares of the company in return. Contrary to the popular belief of it not being a good investment option, it is among the ones that can give you highest returns if chosen correctly. So, let’s first understand what is an IPO and how becomes a profitable investment option.
When do companies go public?
IPOs are issued when smaller companies are seeking funds to expand their businesses and hence invite investors to provide capital to them. The investors are then given the shares on the company which is in proportion to the capital they invest. Since the public or the general investor is directly involved, it helps boost the company’s brand image as well.
What are the various IPO issue types?
The company that goes public can issue in broadly two types:
1. Fixed Price
This is simple and just like the name suggests, the price of the shares are fixed. The company offering IPOs decide the price well in advance and you as an investor get no say in it. You need to buy the shares at the fixed rate decided by the company.
2. Book Building Issue
This is used when the company does not want a specific price set on the security. In cases like these, they offer a price range to the investors. Contrary to the previous type, here you can bid your price anywhere in the given range. This offers more flexibility to the investor.
Advantages of IPOs to the investors
IPOs present a variety of benefits to the investors. These include:
1) The initial stocks are only available to those who are alert and knows about it
2) The prices are on the lower side
3) The prices might shoot up once the company starts picking pace and hence buying IPOs could mean getting those prospective positive shares at low rates
4) If you wish to sell some shares once the company has made profit, you would not only get back your investment but also a significant amount of profit in terms of dividends or capital gains
5) As you own the share of the company, depending on the portion of the stake, you get a chance to attend and have a say in the Annual General Meetings
Benefits for the company
IPOs are a profitable proposition from the company standpoint as well.
1) With more shares made public, it gains the trust of investors in the market
2) Listing on the bourses can enhance the credit rating of the company
3) It can attract top talent and resources as it now offers the stock options to the stakeholders
4) Executive’s wages are adjusted with the promise of cashing it out with the IPO late
To sum it up
Investing in IPO is like playing dart and not carrom. Here, you can’t invest your funds in any and every pocket (IPO) that is closest or convenient. You need to focus instead on the ones that you are confident about and aim for the bull’s eye for the best returns. You might have to wait sometimes, but it is definitely worth the wait!
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