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What is IPO: Check Definition and Importance of IPOs

By : Neha Dhyani

Updated : Jan 11, 2022, 5:32

Capital markets represent a 'primary market' and 'secondary market', and the capital market has two interdependent and inseparable segments, a new issuer (primary market) and 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. 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.

Companies can raise capital in the primary market through IPOs, rights issues, or private placements. An initial public offering (IPO) is a public offering of securities in the primary markets. This is the company's largest source of long-term or indefinite funding. The initial public offering is an important step in a company's growth. This gives companies access to funds through the public capital markets. Initial public offerings also significantly improve the credibility and exposure that companies receive. 

Importance of IPOs

Initial public offerings are 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 initial public offering of the company, the shareholders become the owners of the company and take ownership of the company. Shareholders of the company are free to sell their investment through the secondary market. 

IPOs 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.

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FAQs about What is IPO

Q.1. What is the full form of IPO?

IPO stands for Initial Public Offering.

Q.2. What is an IPO in the stock 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. It is a process that a private company or company can make public by selling a portion of its shares to an investor.

IPOs are typically initiated to inject new stock into a company, raise capital for the future, facilitate the trading of existing assets, or monetize existing stakeholder investments. 

Q.3. What is the IPO cycle?

Enterprises perform a three-part IPO cycle process. This involves the Pre-IPO conversion phase, the IPO transaction phase, and the Post-IPO transaction phase, and these phases are collectively called the IPO Cycle.

Q.4. What is IPO stock?

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.