IPO vs. FPO- Things You Should Know

Whether your business is small, medium, or large, it will require funds for meeting regular operational expenses. Most companies raise funds either as equity or debt. Equity is promoters’ capital while debt can be raised from financial institutions, and even in some cases, from friends and family.

When a company raises equity, it issues shares to the investors. If you plan to invest in the stock market, you need to understand some basic terms, which include Initial Public Offering (IPO) and Follow-on Public Offer (FPO).

What is an IPO?

You may have often heard this abbreviation, but do you know what is an IPO in the stock market?

An IPO is when a company announces offering its shares to the public for the first time. Going public means that the company will offer equity shares to the people and then, is listed on one or more of the stock exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).

An IPO is one of the major sources of raising money from the public to fund the company’s projects and meet other business objectives.

Significance of an IPO for the company

After understanding what is an IPO stock, let us see its significance for the issuing company. At the time of commencing operations, promoters invest their personal money and also raise funds from venture capitalists, investors, and other sources including the government.

However, as the business expands, these sources may not be able to meet the growing fund requirements. At this point, the company may decide to go public for the first time and get listed on one or more stock exchanges via an IPO.

With an IPO, the company is able to raise money from the public to meet its growth capital requirements. Additionally, the Securities and Exchange Board of India (SEBI) regulates IPO and the company once listed must meet the regulatory requirements.

This ensures the management runs the business efficiently to enhance shareholders’ value and prevent any losses. An IPO also increases the liquidity for the company and the shareholders as shares can be easily bought and sold on the stock exchanges.

Significance of an IPO for the investors

Having understood what is an IPO in the share market, let us see its benefits for the investors. If you invest in an IPO and are allotted shares, you gain partial ownership in the company based on the proportion of your investment.

Moreover, if the company performs well, you may enjoy short-term listing gains or hold the shares for long-term returns.

Additionally, when a company decides to go public, other options like employee stock ownership plans (ESOPs) can be made available, which offer multiple benefits like profit sharing for the company’s personnel.

What is an FPO?

Now let us understand what is an FPO; it is a follow-up offer of shares after the IPO. The company offers additional equity shares to the public during the FPO to further diversify its equity base.

Significance of an FPO for the company

Companies issue an FPO to raise additional capital or to reduce their debt liabilities. They can issue an FPO either as dilutive or non-dilutive.

Dilutive FPO

The company issues additional shares in the stock market for the public; however, the value remains the same. A dilutive FPO decreases the share’s price and also the earnings per share (EPS) value.

Non-dilutive FPO

It occurs within the larger shareholders like the promoters and board of directors. They sell their shareholding in the market. A non-dilutive FPO does not increase the number of shares available for the general public but increases their value and changes the EPS.

Significance of an FPO for the Investors

An FPO is a relatively safer and cost-effective option when compared to an IPO. When the company issues an FPO, you already have information about its business, financial statements, management strategy, and other parameters that are important to make an informed investment decision.

What is the difference between an IPO and an FPO?

Every company irrespective of the size and industry requires adequate cash flows for smooth business operations and expansion activities.

Promoters do not have unlimited funds, and therefore, companies issue shares to the general public to meet their fund requirements. The first issue of shares is known as an IPO and the next one is known as an FPO. Let us understand IPO vs. FPO.

Investing in shares can be lucrative since you can potentially earn huge profits, especially if you remain invested for the long term. However, stock market investing is risky as the prices of the shares fluctuate based on the market conditions and volatility.

Are you confused about investing in an FPO vs. IPO?

The decision primarily depends on your requirements, financial goals, and risk appetite. When you invest in an IPO, you have limited information about the company since it is the first public offering of shares.

You will have to conduct in-depth research about the company and its fundamentals. This requires time and expertise, which you may lack especially if you are new to stock market investing.

In this case, opting for an FPO may be more advantageous for your requirements. However, if you are a seasoned investor with a long-term investment horizon, putting money in an IPO can be beneficial.

Another factor that you must consider while contemplating investing in an IPO or an FPO is the risk-return ratio.

IPOs can deliver comparatively higher returns particularly if the company performs well and lists on the stock exchange at a premium over its issue price. However, there are several factors that determine the company's IPO listing price and there is also a risk of the price being lower than the offer price.

As companies grow, they require funds for expanding their business operations, and therefore, issue shares to the public to raise money.

To make an informed decision of whether to invest in IPOs or FPOs, you should consider your financial objectives, risk appetite, and investment horizon.