IPO Vs FPO – Difference and Definition
Before investing in the stock market, every investor has to understand the terms IPO and FPO as they pertain to investments in the stock market.
The two main concepts that firms employed for their own purposes to generate funds from the equity market are IPO (Initial Public Offering) and FPO (Follow on Public Offer).
These two essential concepts, which are commonly employed in the stock market, must be understood at a basic level by any novice who plans to invest in an initial public offering (IPO).
The distinction between IPO and FPO will be thoroughly explained in this blog post.
What Is An IPO?
When an unlisted company (a corporation not listed on the stock exchange) seeks to raise money by selling securities or shares to the public for the first time, it announces an initial public offering (IPO). In other terms, an IPO is the public sale of securities on the primary market. New securities that are issued for the first time are dealt with in a primary market. The corporation becomes a publicly traded company and its shares are available for free open market trading after it is listed on a stock exchange.
What Does An IPO Signify For a Company?
Initially, a company is backed by investors, venture capitalists, and a variety of corporations, including the government. When a company reaches a certain degree of expansion and its funds run out or become insufficient, it goes public for the first time and is listed publicly on exchanges.
This means that if someone decides to invest in the firm, it will receive cash, but it also comes with a lot of responsibility to run the company efficiently. The purpose is to keep stockholders from losing money. This also implies that the corporation and its stockholders will benefit from increased liquidity.
Types Of IPO
There are two types of IPO
- Fixed Price Issue
- Book Building Issue
Fixed Price Issue
When a company issues shares at a fixed price, it specifies that price in the offer document for all of its shares. In this kind of IPO, all investors are aware of the price that the company has set for each share before becoming public. When purchasing a subscription to a certain company’s IPO, they pay the entire fixed fee.
Book Building Issue
Due to the book-building issue, the company uses price bands rather than a fixed price. Only after creating and logging an investor’s demand is the price determined.
What Is An FPO?
FPO, which stands for Follow on Public Offer, is a process in which a company that is already listed on the stock exchange issues shares to existing shareholders or new investors.
The company is undertaking an FPO in order to increase its equity base. The corporation employs FPO only after the IPO process has begun in order to make their shares available to the public and raise funds for their business.
The FPO is raised primarily for two reasons:
- To lower an organization’s existing debt.
- To obtain additional funding for a business.
What Does an FPO Mean for a Company?
An FPO is used to obtain extra cash while also reducing any existing debt that the company needs to pay off. In contrast to an IPO, a corporation can conduct an FPO in one of two methods.
Types Of FPO
- Dilutive FPO
- Non Dilutive FPO
In a dilutive FPO, the corporation issues more shares, but the price of the company’s share does not change and remains constant. This results in a fall in both earnings per share and share price.
The company’s board of directors announces new public share sales here. An FPO, on the other hand, is exclusively utilised by a firm to decrease debt or generate more funds.
Non-Dilutive FPO indicates that the company’s stockholders sell their private shares to the public. The money is transferred directly to the individual offering rather than to the company. As a result, the company’s earnings per share are unaffected.
Why Does a Business Need an FPO?
For numerous key reasons, a company need a Follow on Public Offer to raise extra money, which is accomplished by conducting a dilutive FPO in which fresh shares are offered. A substantial amount of money is generated.
IPO VS FPO Difference
Here are some distinctions between IPO and FPO.
|1.||Meaning||The first time a corporation issues stock.||A corporation issuing shares to raise extra capital following its first public offering (IPO).|
|2.||Price||Price range (fixed or variable)||The price is determined by the market and is affected by the increase or decrease in the number of shares.|
|3.||Share Capital||Increases as a result of the company issuing new capital to the public in preparation for listing.||The number of shares grows in dilutive FPO while being constant in non-dilutive FPO.|
|4.||Value||Costly||Cheaper in most circumstances since the company’s worth is being diluted further.|
|5.||Risk||More dangerous in comparison||Less dangerous in comparison|
|6.||Status Of Company||An IPO is issued by an unlisted Company.||An FPO is issued by a corporation that is already listed.|
It is determined by your risk tolerance and objectives. Because you don’t know much about the company, your risk levels must be quite high if you invest in an IPO. Individual investors and novice investors might consider an FPO. Investing in an IPO necessitates more study than investing in FPO. You must comprehend the foundations of the company. If you are a long-term investor with a high risk tolerance and confidence in the firm, you should consider investing in an IPO. When it comes to the distinctions between an FPO and an IPO, risk and return are crucial. However, risk and reward are linked.
Finally, an IPO indicates that the company’s shares are offered to the general public. While FPO refers to the first-time issuance of stock exchange-listed shares to existing shareholders or new investors.
These distinctions will clarify your investment vision and keep you on course, as they are the first two simple principles that any novice stock investor must grasp in the stock market.
Thank you for taking the time to read this! I hope you enjoyed our article and we have provided you with some information that will be useful to you in the future.