Initial Public Offering (IPO) is a process through which any company offers shares to all investors(institutional or big investors, retail investors(common people). Through IPO, a company is actually letting common investors to be part of their company through investing their individual money.
When a company decides to file for an IPO, it will issue shares in public domain with a predetermined price band(Rs.50, 100, 200 etc.), investor who thinks that this company is worth investing, they will apply for its IPO. This money helps companies in various ways. For example:
- The money that gets generated through IPO helps in growth and expansion.(increasing production, manufacturing units, manpower etc.)
- Through IPO company can also avoid more debt or loan, which increases more profitability.(lesser debt means lesser interest to pay)
- Due to share listing a company credibility also gets increased, which helps to obtain better terms when seeking funds from banks or large investors.
- One more important thing which can be called negative for investors but positive for company is risk. By involving large people they are reducing risk to their business, as being investor you own certain percentage(as you hold shares of that company), if company fails to delivery in future, there shares may hit, company valuation will be down and your money will be lost.
Take this truth as ‘pinch of salt’ but its indeed true that you are now part of the risk as a part of the business. But this is also truth that no bushiness can happen with zero risk.