If you are a stock market enthusiast, you might have come across these two terms that sound similar, IPO and FPO. It’s possible that you may have a basic understanding of these terms too. But you have to understand first what is the difference between IPO and FPO? If you are a novice trader and want to understand these two terms in detail, keep reading. Even if you know the basics of IPO and FPO, you will surely gain something useful!
IPO
Initial Public Offering, commonly known as IPO, is the way through which a privately held company takes itself public. The process of allotting the shares of a company for the first time in the stock market knows is IPO through SEBI authorization. Shares offered in this manner are available for trading on the market for everyone.
Why a Company Issues IPO?
The sole purpose of establishing a company is to expand it and ultimately earn more profit. In the initial stage, the company is gains funds from banks, government subsidies, private finance, or angel investors. But as the company expands, these funds are not sufficient to mitigate the cost of extended operations.
IPOs are issued to solve this fundamental problem of funding. IPO brings in much financing that can help a company in expanding its operations and business domain. Offering IPO also means that a company is ready to play big in the market and is prepared to compete against the giants!
Taking a company public is a very daunting task. Much hard work, management and planning go into it. Moreover, there is a chance of a backlash from shareholders in case of uneven management of a Public company. So, companies take this step after a lot of consideration and planning.
What’s in it for an Investor?
If you subscribe for an IPO, it means that you are showing interest in the company and you have well-studied and well-understood the company and its financial details. If you are allotted the IPO, you become a partial owner of that company, and you can benefit from its performance in the market. At the same time, if the company underperforms, the value of your company degrades, and it will wash away your investment.
So IPO can be an excellent opportunity to become a part of any company, but it does carry some risks. So, it’s better to take a piece of advice from a financial expert to make a perfect choice.
FPO
Follow on Public offer or FPO as it is generally known, is the step taken by a company that is already listed on the stock market to raise capital. Here, the risk is comparatively low as the company is already listed on the market and has financial details publicly available. So, it offers an excellent opportunity for investors to study it before taking any decision.
Why the Company Issues an FPO?
The purpose of issuing FPO is to reduce the debt on the company or to expand its existing operations and business. In short, the ultimate goal of issuing FPO is to raise capital for an already listed company.
Types of FPO
FPOs can be classified into two parts, based on the way the offer shares to the investors.
- Non-Dilutive FPO: In this mode, the existing Big Shot shareholders like directors, CEOs, and founders offer their privately-owned shares to the public. Here the number of shares stays the same, and hence the value of a share is not reduced, or in other words, the amount of shares is not diluted.
- Dilutive FPO: In this mode, a company offers new shares to the interested investors. Here, the company’s value remains the same. So, in this case, the cost of a share is reduced or diluted.
What’s in it for Investors?
FPO offers an excellent opportunity for investors to invest in a good company. Many companies have the potential to grow, but their potential is not fully realized due to existing debts and lack of budget. When such a company issues FPO, investors can grab that opportunity.
Also Read: What Is IPO grey Market?
What’s better, FPO or IPO?
FPOs are generally considered safe as financial details of the company offering FPOs is available in Public domain. Moreover, IPOs are expensive as compared to FPOs.
Major Difference Between IPO and FPO
| Initial Public Offer (IPO) | Follow on Public Offer (FPO) |
|---|---|
| First-time money raising event from public or market | It occurs after an IPO so money is already raised through an IPO |
| Focus on fund expansion plans | It assists in reducing stakes existing promoters in a firm |
| Much riskier for buyer as a shares get listed for the first time | Shares are already listed so it is less risky |
| Seen in private sectors mostly | Used by the government to reduce stake in firm. |
Conclusion: Ultimately, it all depends on the goal and risk appetite of an investor. As an investor, if you are ready to take a risk and have long term goals, you can earn Big, Fat profit from IPO.
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