What Is An IPO: Meaning, Pros And Cons 

If you have just opened a trading account, you must keep an eye on upcoming IPOs. If you do not know IPO’s meaning, do not fret because it is easy to understand. When a private company decides to raise funds by selling its shares for the first time to the public, it is called an “IPO” or an “initial public offering.”

By selling its shares, it raises capital, which can be used to expand and grow. However, in lieu of the funds from investors, a company’s promoters have to sell some of their stake in the company.

Having understood IPO meaning, let us understand its pros and cons.

Pros of initial public offerings (IPOs)

1. Helps Companies Raise Capital

The money that companies raise through an IPO is typically used for expanding, which helps them grow and generate a high return for their shareholders. Most companies, which intend to become a large business, have to approach people for funds because their promoters often do not have sufficient resources to finance the expansion of their business.

2. Enables Investors To Find Companies With A Growth Potential

IPOs provide a great opportunity to investors to invest in companies with a growth potential. The success story of Reliance Industries’ IPO in 1977 is a classic example of how IPOs can help retail investors make money.

3. Publicity For Companies

When companies announce their IPO, they have to increase public awareness about their operations and products. As more people get to know about their products, it can help companies increase their market share.

4. Improves Transparency In The Reporting Of Companies

When a company announces its IPO, it has to follow strict rules and regulations to report its financial and business performance. Based on such information, investors decide whether to invest in a company or not. Hence, IPOs result in better-quality information about companies, which is not possible if companies choose to remain private.

Cons of initial public offerings (IPOs)

1. Analysing Ipos Can Be Difficult

It is true that IPOs can offer great opportunities for people to invest in. However, you need to have the right skills and knowledge to analyse an IPO. For example, you should know how to interpret financial data disclosed by a company in its prospects. Then, you must know about a company’s industry to have an informed opinion about its products and services. A lot of retail investors do not know how to analyse an IPO, which makes it difficult for them to decide which IPO is worth investing in and which one is not.

2. Less Autonomy

In a private company, a chief executive officer (CEO) or a chairman has a lot of authority. However, when a private company raises funds through an IPO, it becomes a listed company. Listed companies are run by a board of directors who appoint a CEO. Now, a board may give power to a CEO. However, CEOs in listed companies typically have lesser autonomy than their counterparts in private companies. Per se, this is not a limitation. However, at times, there is friction between a company’s board and its CEO, which can even affect its day-to-day operations.

IPOs require companies to spend a lot on regulatory compliance. Besides, during the transaction process of an IPO, a company has to spend on an investment bank, an underwriter, and even an advertiser. Such costs make IPOs an expensive option to raise capital. If such expenses are not managed efficiently, they can even affect a company’s profitability.

Conclusion

While it is not difficult to understand the meaning of IPO, it is a bit tricky to find the right IPOs to invest in. Even seasoned investors at times struggle to analyse an IPO. Hence, if you have just started trading, you should learn how to analyse a company’s financials and gain knowledge about the main industries of the Indian economy. After you build the required knowledge and expertise, you should start investing in IPOs.

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