IPO V/s FPO - Which one to invest in?

Initial Public Offering (IPO) and Follow-On Public Offering (FPO) are two important concepts that every investor should know about. However, if you’re new to the Indian stock market, you may be unaware of what these concepts entail. In this article, we’re going to be taking a comprehensive look at what these two terms mean and the difference between an IPO and an FPO.

What is an IPO?

IPO or Initial Public Offering, is the process through which a company issues its equity shares to the public for the first time. In exchange, the company receives funds from the public.

The shares of a company that has gone through the IPO process are listed on the Indian stock exchanges - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Once the shares are listed on the exchanges, they can be bought and sold freely without any restrictions.

Before we move on to the differences between an IPO and an FPO, let’s try to get a deeper understanding of the IPO.

Types of IPO

There are two types of IPOs that companies can choose:

• Book-Building IPO:

  In the Book-Building IPO, the share price isn’t fixed from the start but an indicative price range is given and investors place bids within those prices. The final price is determined by demand during the bidding process. This approach helps to set up a price based on market demand.

• Fixed Price IPO:

  In Fixed Price IPO, share prices are predetermined by the company and mentioned in the offer document. Investors know the price at which they will be able to subscribe to the shares. Although this method provides certainty regarding price for shareholders, it does not always represent accurate market demand for securities.

What does IPO mean for the company?

The following are the implications of an IPO for the company:

• Public Offering and Ownership:

  When a company is listed, it is essentially inviting people to come and purchase shares in its business. Consequently, these new investors then become part of the owners of the firm. Sometimes, after the big launch, the founders as well as early investors may sell some of their shares.

• Enhancement of Reputation:

  By going public, companies can put themselves out there for everyone to see which makes them popular with customers and suppliers. It’s like entering into another world within the corporate sector.

• Freely Tradeable Currency:

  This means that once a company has gone public on any stock exchange, its shares can be freely bought or sold. Investors can always trade them easily and the company can even use their stocks for acquiring other companies or issuing to employees for pay.

• Regulatory Obligations:

  Nevertheless, being publicly traded also brings along compliance requirements with regulatory authorities. Listed companies are tightly regulated especially regarding filing financial information.

What does IPO mean for investors?

It is not only companies but also investors who benefit from IPOs. Here’s how:

• Opportunity to Get Involved:

  IPOs allow common people like us to purchase the shares of a company. It is akin to being a part of the business from the start that could turn out to be highly successful.

• Future Profits:

  The early investors could earn significant amounts if the business performs well after going public. Think of it as catching a wave when stock prices skyrocket.

• Dealing with Volatility:

  However, this does not mean it is all rosy. IPOs can be roller coasters. As everyone runs to grab these stocks, their prices tend to fluctuate wildly during the initial stages.

• Discovering New Markets:

  Many times, IPOs represent new trendy firms that are just entering into large-scale operations. With such an approach, investors may introduce some variety in their portfolios and enter into other spheres.

• Fast Come, Fast Go:

  Many investors take IPOs as an opportunity to make some quick listing gains. They sell in profit as soon as the stocks are listed. However, it is not always the same as some IPOs are listed below the issue price.

What is an FPO?

Before we do a detailed comparison of IPO vs FPO, let’s swiftly go through the concept of Follow-On Public Offering (FPO).

A company that has already issued its shares to the public via an IPO may require access to more funds. In that case, it can choose to issue more of its shares to investors in exchange for capital. All subsequent issues of shares other than the initial issue are termed Follow-On Public Offerings (FPOs).

Types of FPO

FPOs are mainly divided into two types:

• Dilutive FPO:

  In this case, a company that is already listed on the stock exchanges offers more shares to the public. This increases the number of shares in circulation, thus reducing the equity interest of existing owners; hence it is called dilution FPO.

• Non-Dilutive FPO:

  On the other hand, Non-dilutive FPO basically means that a company is offering more shares to the general public without making its current shareholders own less percentage of the business. The best part about it is that such an action leads to a win-win situation. The organisation manages to secure funds for expansion while keeping the existing shareholders's ownership intact.

What does FPO mean for the company?

Keeping the difference between IPO and FPO aside, let's explore the implications of FPO for the company which are quite similar to that of the IPO.

• Obtaining Cash:

  The issuing company can generate more funds using FPO which can be used to fund business growth, repay debts, carry out research or just maintain the normal operations of the firm.

• More Outstanding Shares:

  By issuing more shares, the company actually puts more ownership in the public hands. This makes it easier to buy and sell stocks in an open market, which could draw in large investors.

• Market Perception:

  An FPO can communicate how well or badly the company is performing in relation to its financial status. For instance, ‘we need some extra cash because we are doing great’ but also this could mean that a company has had some challenges if it needs cash to cover losses or debts.

• Compliance:

  Between IPO vs FPO, the compliance process is alike. Before companies go for FPO, they have to follow a similar process regarding SEBI compliances like issuing and filing of reports. The company has to prepare for all the paperwork that follows the launch of FPO.

What does FPO mean for investors?

This is what FPO means for you as an investor:

• More Investment Options:

  FPOs enable existing and potential shareholders to acquire additional shares in the company. In other words, if you hold an investment in a particular company or see one as having potential, you can buy more of the same shares so that your stake is increased or start all over again by investing in FPO.

• Dilution of Ownership:

  In the face of the increased number of shares being offered, portions held by individual shareholders might decline a little bit. It is called “Dilution”. On the other hand, if you do not want your piece to get smaller, then buy into FPO action.

• Effect on Stock Price:

  When the issue price for FPO is set below the market price, many traders are eager to gain quick profits. Hence, there could be a rise in stock prices because several people may want to buy them. Conversely, the demand is lower if it’s overpriced and this may keep the price stable or even decline in some cases.

IPO V/s FPO

The table below should give you a good idea of the differences between an IPO and an FPO.

This detailed comparison between IPO vs FPO can help you make an informed decision if you wish to invest in either of these two issues. Remember to consider the differences between an IPO and an FPO. This will help you determine the option that’s more suitable for you.

Once you’ve made your decision, you can invest in a wide range of IPOs and FPOs of companies with the m.Stock trading app. In addition to seamless investments, you also get to enjoy zero brokerage trades across trading segments.