Friday, June 5, 2009


Inital Public Offering – An ExplanationPosted by iasmentor under Uncategorized [2] Comments
An IPO(Initial Public Offering) is a method to raise funds by a company which has been so far privately owned but now wants to offer its shares to the general public throughthe share market. Usually companies which havr made a fair bit of progress and want to get to the next level adopt this method. It allows the company to reach a largepool of investors to acquire a substantal amount of money to finance its upcoming projects. The existing shareholders have to dilute their shares in order to accomodatethe investor’s share in the hope that additional capital and resultant boost in the company’s performance will enhance the value of comapny’s share.
How is it different from the normal share trading?It is the first step of the company in going raising funds through the general public. The funds go directly from the share buyer to the company, instead of share market(or the secondary market) where the money just exchanges hands between various investors in the market. This is one reason why the IPO market is also reffered to as thePrimary Market. The company is not obliged to repay the capital, but the investor has a right to future profits distributed by the company and the right to a capitaldistribution in case of a dissolution.
How it is done??the companies cannot directly enter the market and offer shares to the public. For this they need an uderwriter. The job of the underwriter is to determine the form, priceand structure for the IPO. The underwriters work on a commission basis, based on a percentage of the value of the shares sold.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in thestock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwritersarranging share purchase commitments from leading institutional investors (insurance companies, mutual funds etc.)

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