What is Initial Public Offer (IPO)

Let’s suppose ABC Company started its operations in 2010 with the small capital of the owner. During the last 10 years, the company made profits and makes its owners rich. As the company grew the demand for more funds poured in. However, the owner has limited capital to invest in. The option is now to ask a loan from the bank or to ask the public at large to invest in the company.

The latter is known as going public or to raise the capital from the public.

When a company for the first time went to the public from a private limited is known as an “Initial public offer” (IPO). The capital market is divided into two categories Primary Market & Secondary market. The primary market is the IPO market & once the company gets listed on the exchange it comes under the secondary market.

We should invest in IPO?

When a share first time comes into the market, it brings lots of opportunities for growth and gains. However, investors should carefully read the red-herring prospectus filed by the company which is mandatory as per the directive from SEBI when a company decided to bring its public offer.

What to look after in IPO:

  • What are the objectives to issue an IPO: The objective is a very crucial check whether a company is in expansion mode or it wants to repay its debt. Further, the funds will be used in promotion and branding. As it will help in identifying the purpose of IPO.
  • Company historical performance: The past year’s performance in the core business model is reported by the company in the prospects along with future projections.

Ratings from big rating & credit agencies:  Another important check is to find out how the rating is given by the well-known agencies like CRISIL, S&P & ICRA, etc. It helps in evaluating the risk profile of the IPO.

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