You may have often come across the term ‘IPO‘ or ‘FPO’ when you read about companies that are looking to gather funds for their operations or expansion. However, the name Initial Public Offering (IPO) is more commonly heard than Follow-on Public Offer (FPO) as there are fewer FPOs than IPOs.
What is FPO?
An FPO is a process to issue shares to investors on the stock exchange. It is a means of raising additional equity capital to meet the company’s need for running their operations or execute their expansion plans. Essentially, the FPO meaning is that any public offerings made after the IPO constitutes an FPO.
How is an IPO different from an FPO?
In an IPO, the company is unlisted before its Initial Public Offering. This makes it a relatively high-risk investment since the potential investor may not have any track record of the company to analyse before investing.
An FPO, on the other hand, is offered when the company is already listed. This allows the investors to look at market trends and track their potential investment for a while before they make the decision.
While IPOs are used by private companies for fund expansion, a lot of government entities use FPOs to cover their debts or losses or reduce their stake in the company.
What are the types of IPOs and FPOs?
There are two types of IPOs:
1. Fixed-Price offering
A fixed price offering, like the name suggests, offers the initial company shares at a fixed price. The price is decided by the company, and the investors are aware of the share prices before the company goes up for the public offering.
2. Book Building offering
The book-building offering involves a bidding process. The price per share is not fixed. It is determined through a bidding process, and the price is decided after the bidding is closed. The investor must specify how many shares and how much they would pay for the same.
There are two types of FPOs:
1. Dilutive offering
A dilutive FPO is when the company wants to release more shares to collect more funds. This is done to pay off the debts. However, in the case of a dilutive FPO, a company’s value remains unchanged, which results in a decrease in the per-share earnings of the company.
2. Non-dilutive offering
In this case, the founders or large shareholders of the company release some of their shares to the public. The money from this goes to the individual offering the shares and not the company. Therefore, the per-share earnings of the company remain unaffected.
Investing in IPOs and FPOs involves different risks. While IPOs are at high risk, they may also result in higher profits. Whereas FPOs are more reliable since the company is listed and there is more information available about its journey in the stock market.
The nuances of each type of investment, its advantages, disadvantages, and limitations can be challenging to understand completely. If you wish to invest in an FPO but are unsure of how to go about it, you can rely on an investment broker to guide you through it. Get in touch with one now, so that you can start building for your financial future!