Understanding how a business raises capital and acquires funding is crucial for any eager investor looking to partake in a company’s growth. Funding through the stock market is employed by several businesses for expansion, debt servicing, or liquidity provisioning. This article analyzes the three principal ways companies acquire funds from the stock market: Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), and Right Issues.

The motives behind a company going public transcend beyond profit making, a primary reason is debt servicing along with expansion and project development. A public offering enables the company to improve their financial standing and grow. Investors get a stake in the company that guarantees them shares in the profits of the company. Beyond just profit making, stock ownership enables one to be part of the company.

Moreover, industry leaders and corporations that have primarily gone public, such as Reliance Industries, Hindustan Unilever (HUL), or Wipro have amassed gains that are intact over long stretches of time.

How are funds raised by the company?

Three principal methods to acquire funds through the stock exchange are:

1. Initial Public Offering (IPO) – Issued by newly established companies venturing in the market.
2. FPO (Follow-on Public Offering) – Publicly traded companies looking to raise additional funds.

3. Rights issue – Allocation is done to shareholders as recognition of their loyalty. Each of these methods has a specific purpose to serve and is supposed to cater to specific classes of investors.

Initial Public Offerings (IPO)

An Initial Public Offering is the first sale of a company’s stock to the general public. An IPO is a multi-faceted strategy that companies use to get funding, enhance their credibility in a chosen market, and boost liquidity. The IPOs of Reliance Power DMart and Rossari Biotech Ltd. served their purpose well.

Why companies choose IPOs?

Injecting capital to finance expansion. The shares are more liquid due to being publicly traded. Stock options can now be useful to employees. Improves the company’s credibility and reputation. Possibility of mergers and acquisitions.

Why Invest In An IPO?

Investing comes with rewards and risks, so one needs to be well informed before investing. Financial specialists and the Red Herring Prospectus are available for guidance. The financial condition of the company and its debt must also be taken into account. Helpful tips can also be checked on the Moneycontrol site.

Follow on public offer (FPO).

A follow on public offering (FPO) can be done only by companies that are listed and it is almost similar to an Initial Public Offering (IPO). A FPO offers additional shares to the public as a means of increasing a company’s capital. New shares to FPO’s tend to be offered at discounts to entice more investors.

Reasons for taking an FPO:

Additional legislation and funds requirement

The wish to grow the shareholder count as well as the company’s capital.

Investing in FPOs: An investor must first review the financials and the working of the business before buying into an FPO. Get in touch with a professional to discuss your investment ideas and plans risks for an FPO.

Right Issue

In the right issue, the existing shareholders of the firm can buy the shares on offer at a lower price than the market average to help the firm raise some money. This option is primarily used to reward current shareholders and restrict dilution of their shares.

An instance of this in action is a recent Reliance Industries Limited right issue.

Why take a rights issue?

Allows current stakeholders of the company with an option to get some extra shares at a lower price.

Guarantees shareholders do not lose their percentage of the authority of the company.

Think before proceeding with the investment and ensure that the terms of the rights issue are favorable. Also consider the company’s background and how the business is performing financially at the moment.

Disparities between IPO, FPO, and Rights Issue

Investors need to comprehend each of these concepts thoroughly.

IPO: The initial phase of a company’s growth in which it offers stock to the general public for an expansion initiative or an entry into the market.

FPO: Stocks offered by a publicly traded corporation to obtain additional funds.

Rights Issue: A rights issue is available for current stockholders and is used to generate revenue to operate the business.

Investor’s Major Considerations

Investing In IPOs Always remember to conduct extensive risk analysis of the company and its underlying business before making any investments in their IPO.

Investing in FPOs Before committing to invest, analyze the performance of the publicly trade company’s stock in the past and determine the valuation of the company in the present to try and mitigate risks.

Participating in Rights Issues allow shareholders of a company to consolidate or increase their control over the company. As a recommendation, it is best to assess the situation with a professional financial adviser before making a decision.

Conclusion

By taking part in Initial Public Offerings and Follow-Up Public Offerings, investors can partake in the growth and financial journey of a business. The advantages and risks for each method of fundraising, need to be thoroughly analyzed. If undertaken carefully, these methods of raising capital have the potential to bring reasonable returns while helping companies grow and prosper.

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