IPO share literally means Initial Public Offer. These are the common shares issued by a corporation to general investors through a stock exchange. IPO shares are one of the very important means through which a company raises capital for its future growth (expansion of business, setting up of new business set-up, modernization of existing business). It specifically means issuance of a company's share to the general public for the first time to raise capital. The investors who have bought the IPO shares are entitled to the right to get dividends whenever the company makes profit.
Share Market can be divided into two parts :-1. Primary Market
It is the market where new issues of securities are offered to the investors.2. Secondary Market
An investor of a secondary market buys a security from another participant of the same and not from any issuing corporation (as in case of Primary Market).
IPO shares are issued to the public through the market known as Primary Market. This is the market where company shares are sold directly to the investors by the issuing company for the first time. After this, the company receives the money and issues share certificates to the investors. IPO share issuance is one of the mode of converting the nature of capital from private to a public one.
Listing of a IPO share involves regulatory compliance and reporting requirements. Hence, it involves one or more investment banks as underwriter(s) who would be responsible for assessing the whole process of share issuance by the issuing company to the public and also giving access of these to the public.
Historically it has been seen globally that the IPO shares are generally issued underpriced. Investment banks, in the role of underwriter(s), always try to fix the issue or offer price of an IPO to such a level where it is low enough to arouse interest among general investors but at the same time high enough to raise required capital for the future project. Generally, there are a syndicate of underwriters who are employed by the issuing company to determine an optimal price for the IPO.
Process of IPO Share Issuance
- The IPO share issuing company, known as the issuer, appoints leading investment banks as underwriters
- Investment Banks come up with an optimum price at which the IPO share can be issued
- Underwriters approach the general investors through advertisements and other means for selling these shares
IPO shares can be sold to the public through many methods such as
- Self Distribution of Shares
- Commitment of the firm
- Dutch Auction
- Best Efforts
- Bought Deals
Find out more about Investing IPO Stocks