What is an Initial Public Offering (IPO)?

What is an IPO? What are the different types of stock offerings?

What is an IPO?

Initial Public Offering (IPO) refers to the process of offering shares of a private entity to the public (retail/institutional) via a new stock issuance.

Through this process, also known as stock market launch, a privately held company is transformed into a public company. IPOs can be used by companies to raise new equity capital, monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded. This presents an opportunity for the institutional/retail investors to own a stake in the company which was unavailable otherwise to the general public.

After the IPO, shares are traded freely in the open market at what is known as the free float.

Different ways in which a stock is offered to general public:

Initial Public Offering (IPO)

As stated above, this is the first sale of shares by a company to raise capital from the primary market. Example: Yes Bank offered their shares to the public via IPO for the first time in 2005 to raise 315 Cr.

Follow-on Public Offering (FPO)

When a company already listed on the stock exchange floats an offer to raise further equity via the IPO route, that issue is known as Follow-on Offer. Example: Yes Bank offered their shares to public via FPO to raise additional capital in 2020 to raise 1500 Cr.

Offer for Sale (OFS)

When the current promoters or angel/anchor investors decide to sell a portion of their stake via the IPO route, that issue is known as offer for sale.

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