These concepts are the first few fundamentals that budding stock investors should learn about before they begin stock market investments. Initial public offer (IPO) and follow-on public offer (FPO) are two basic fundamental ways a company raíses money from the equity market. Companies can also raise money by way of corporate bond issuance. Explained ahead is the difference between IPO and FPO in detail, against different parameters.
Initial public offering or IPO is the first time a company goes public. When we say a company has gone public, it means it has offered its shares to the public at large and is ready to get listed at the stock exchanges of the country. We have two exchanges: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The first time a company gets listed at BSE, NSE, or both and offers its shares to be publicly traded the offering is called an IPO.
When a company is set up, it gets funding from various corporations, investors, angel investors, venture capitalists sometimes even the government. Once the company reaches a bigger stage of expansion and these funds dry out or are insufficient, a company launches an IPO, goes public for the first time and gets listed on the exchanges.
It means that the company will get funding when you invest in it but it also comes with a great deal of responsibility of running the company in an efficient way so that its shareholders do not run into losses. It also means increased liquidity for the company.
Buying a share or a number of shares in a company means you are getting part ownership in the company. Once a company goes public, it also opens up options such as ESOP or employee stock ownership plans. A company may offer employees stock ownership which also has benefits like profit sharing.
FPO is a follow up to the IPO as the name suggests. A follow on public offer is the issuance of shares after the company is listed on a stock exchange. In other words, an FPO is an additional issue whereas an IPO is an initial or first issue.
An FPO is done to raise additional capital or to reduce existing debt and a company does it in two ways:
Dilutive FPO: In dilutive FPO, the company issues an additional number of shares in the market for the public to buy however the value of the company remains the same. This reduces the price of shares and automatically reduces the earnings per share also.
Non-dilutive FPO: Non-dilutive IPO takes place when the larger shareholders of the company like the board of directors or founders sell their privately held shares in the market. This technique does not increase the number of shares for the company, just the number of shares available for the public increases. Unlike dilutive FPO, since this method is not doing anything to the number of shares of the company, it does not do anything to the company’s EPS.
If we differentiate between IPO and FPO, FPO is a cheaper and safer option as compared to an FPO. When it comes to an FPO, you already have an idea about the company, the business, management strategy, financials and all other parameters.
Here are a few differences between IPO and FPO
|1.||Meaning||The first issue of shares by a company||Issuance of shares by a company to raise additional capital after IPO|
|2.||Price||Fixed or variable price range||Price is market driven and dependent on number of shares increasing or decreasing|
|3.||Share capital||Increases because the company issues fresh capital to the public for listing.||Number of shares increases in dilutive FPO and remains the same in non-dilutive FPO|
|4.||Value||Expensive||Cheaper in most cases because the value of the company is getting further diluted.|
|5.||Risk||Riskier||Comparatively less risky|
|6.||Status of the company||An unlisted company issues an IPO||An already listed company issues an FPO|
It depends on your risk level and goals. Your risk levels need to be extremely high to invest in an IPO because you do not have much idea about the company. An FPO is relatively a safer bet for individual investors and new investors. Investing in an IPO requires more research than FPO. You need to understand the company fundamentals. If you are a long term investor, with a good risk appetite and have faith in the company, you can consider investing in an IPO. When it comes to the differences between FPO and IPO, risk and returns are very important components. However, risk and returns are correlated. IPOs have more potential to return more money if the company kicks off to a good start but there are more ‘ifs’ to it. To understand your profile as an investor and then take the decision.