While investing in the stock market and if you are someone who always keeps an eye on IPOs, you may also have come across the term FPO and wondered what it is. This blog will help you decode these terms. Both methods involve raising funds by selling shares to the public, but they serve different purposes.
Let's first take you through the most common way of raising funds, i.e., IPO or Initial Public Offering. An Initial Public Offering (IPO) is the first time a private company offers its shares to the public on a stock exchange. Before an initial public offering (IPO), the company's shares are not accessible to normal investors through exchanges. However, these companies can still get capital from the market through their stocks that are available in the unlisted or grey market; more about that in the grey market blog.
With an IPO, the company's main objective is to raise capital by selling their shares to the public. The company can use the raised capital from the IPO to finance its development or expansion, settle debts, or invest in new projects. After the IPO is offered and subscribed, the company gets listed on the BSE and NSE for further trading.
Now let's discuss the less heard term, FPO, or Follow-on Public Offering. An FPO, or follow-on public offering, occurs when a company that is already listed on a stock exchange issues additional shares to the public, i.e., they sell more of their stake to the public to raise capital.
It may seem negative, but the company often does this to get immediate funds for project completion or other development needs. The new shares in an FPO can dilute the ownership stake of existing shareholders because the total number of outstanding shares, i.e., the shares available of the company in the market to trade, increases.
IPO vs FPO
| IPO |
FPO |
| Purpose |
| Helps a private company go public and raise initial capital. |
Allows an already public company to raise additional capital by issuing new shares. |
| Risk Level |
| IPOs often involve higher levels of uncertainty due to the lack of a public trading history for the company. You rely on the company’s prospectus and market speculation. |
Generally considered less risky because the company already has a track record of share performance in the market, and you can review its historical data before investing. |
| Price Discovery |
| The share price is determined through book building or a fixed price, and there is no prior market performance. |
The share price may be closer to the existing market price, which gives you a clearer view of potential valuations. |
| Investor Perception |
| Attracts high public attention because it marks the first time a company’s shares become available. |
Generally, attracts existing shareholders and new investors who already have some idea about the company’s fundamentals. |
Which One Should You Consider?
Though IPOs are most opted for by the investors who want to profit from the company's listing gains in case the company offering the IPO has strong fundamentals. The FPO can provide you with access to more company shares, often at a competitive price. In the case of a company with a proven market record, FPO may not be a concern, but as an investor, it's important to be aware of how the funds will be utilised by the company. Whether it's an IPO or FPO, always perform your due diligence by reading the company’s prospectus, studying its financial statements, and evaluating industry trends before committing your funds; you can also discuss it with your financial or investment advisor.