What is Initial Public Offering (IPO)?

By : Neha Dhyani

Updated : Sep 14, 2022, 11:38

IPO, also known as Initial Public Offering, refers to the shares of a company that are offered to the public for investment for the first time. An IPO is the company's largest source of long-term or indefinite funding. The initial public offering is an essential step in a company's growth. It gives companies access to funds through the public capital markets. Initial public offerings also significantly improve the credibility and exposure that companies receive.

Companies must fulfill specific criteria to hold an IPO, such as meeting the Securities and Exchange Commission (SEC) requirements. Companies can raise capital in the primary market through IPOs, rights issues, or private placements.

Full Form of IPO

The full form of IPO is Initial Public Offering. It is also known as a stock launch. Companies mostly hold an initial public offering to raise equity capital. The process of holding an IPO is known as floating or going public, and it transforms the private corporation into a public one.

IPO Meaning

Here, we have discussed the meaning of IPO in detail. Capital markets represent a 'primary market' and 'secondary market,' and the capital market has two interdependent and inseparable segments:

  • A new issuer (primary market)
  • A stock market (secondary market)

The primary market is used by issuers to raise new capital from investors through IPOs, rights issues, or offers to sell stocks and liabilities. On the other hand, active secondary markets drive primary market growth and capital formation, as primary market investors are guaranteed a continuous market with the opportunity to liquidate their investments.

IPO Process

There are two parts to an IPO process: the first one is the pre-marketing phase, and the second is the phase of the initial public offering. In the pre-marketing phase, the company interested in holding an IPO advertises private bids or releases a public statement regarding the offering. Here, we have listed all the steps in the IPO process:

1. Pre-Marketing IPO Process

This process involves forming a team of underwriters, lawyers, SEC experts, and CPAs (Certified Public Accountants) to discuss the offering price and the number of shares. The next process is documentation of the company for initial public offering. Information regarding the company and the number of shares it offers is made official.

2. Marketing Process of the Initial Public Offering

After that, the marketing process for the IPO begins. In this process, the executives and underwriters market the issuance of shares for the company to estimate the final offering price of the company shares. Underwriters are entitled to revise the financial analysis during the entire marketing. This can also include changing the cost of the IPO and the date of issuance, as the underwriters see fit. The companies can take any steps necessary to meet specific share requirements.

3. IPO Shares Issued

The shares of the company are issued on the Initial Public Offering date. After the stock issuance, the capital from shareholders is collected as cash. This transaction is recorded under stockholder equity. Subsequently, the value of the balance sheet share becomes dependent on the company's stockholder equity per share valuation.

4. Post IPO Process

After the IPO is launched, some post-IPO provisions can be instituted. The underwriters have a limited time frame to buy additional shares after the release of the initial public offering (IPO) date. On the other hand, some investors may be given a quiet period.

Importance of IPO Investment

An initial public offering is often the only way to fund rapid growth and expansion. From an economic point of view, a large number of IPOs is a sign of a healthy stock market and economy. When a company first goes public, there is a direct relationship between the company and the investors, and the money is sent to the company as stock capital.

Therefore, by participating in the company's initial public offering, the shareholders become the company owners and take ownership of the company. Shareholders of the company are free to sell their investments through the secondary market.

IPO in India

After a long pause, the primary market regained its importance in 2015. In 2015, more than 60 crores were raised through the public stock market. Considering how much money was made by listing in India, there was a dramatic increase over previous years. There was an increase of 844% compared to 2014 in the Initial Public Offering.

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FAQs about What is IPO

Q1. What is the full form of IPO?

The full form of IPO is Initial Public Offering. An IPO is also colloquially known as 'going public' or 'floating.' Through IPO, companies can raise significant amounts of equity capital which can be an exit strategy for the company's initial founders.

Q2. What is IPO in share market?

Initial public offering (IPO) describes the process of publicly offering shares of a private company as part of new share issuance. IPOs allow businesses to raise money from public investors.

Q3. What is the IPO process?

The IPO process is divided into multiple parts. There is the Pre-IPO conversion phase, the IPO transaction phase, and the Post-IPO transaction phase, and these phases are collectively called the IPO process.

Q4. How does IPO work?

IPO is a process that a private company can go public by selling its shares. After the IPO, the company's stock will be traded on the free market. Investors can resell these shares through secondary market transactions.