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What are the Differences between IPOs and FPOs?
IPOs and FPOs – are you in two minds about which one to invest on? Before diving into the stock market, it is essential for aspiring investors to grasp the fundamental concepts of initial public offerings (IPOs) and follow-on public offerings (FPOs). Both IPOs and FPOs serve as primary methods for companies to raise funds from the equity market. Here is a comprehensive comparison between IPOs and FPOs, highlighting various parameters for comparison.
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What are IPOs?
An IPO represents the first instance when a company goes public, offering shares to the general public and getting listed on stock exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). There are three types of IPOs:
- Fixed Price IPO: Shares are offered at a fixed price throughout the bidding process.
- Book Building IPO: Investors determine the share price through a bidding process.
- Dutch Auction IPO: Investors bid for shares, specifying desired quantity and price, and shares are allocated to the highest bidders at an even rate.
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Benefits of IPOs
There are various advantages:
For the Company:
When a company launches an IPO, it aims to raise funds by selling shares to investors. This capital infusion enables the company to expand its operations and increase liquidity.
For Investors:
Investing in an IPO involves acquiring ownership in the company. It may also provide additional options such as employee stock ownership plans (ESOPs) or profit-sharing opportunities for employees.
What are FPOs?
An FPO refers to the subsequent offering of shares by a company already listed on a stock exchange. FPOs can be classified as either dilutive or non-dilutive.
1. Dilutive FPO: The company issues additional shares, potentially reducing the value and earnings per share (EPS).
2. Non-dilutive FPO: Existing shareholders, such as the board of directors or founders, sell their privately held shares, increasing the number of shares available to the public without impacting the company’s EPS.
Benefits of FPOs
There are various benefits:
For the Company:
FPOs are typically conducted to raise additional capital or reduce existing debt.
For Investors:
Investing in an FPO is considered relatively less risky than an IPO since investors can analyze the company’s past performance and conduct fundamental analysis.
What are the Differences between IPOs and FPOs?
There are quite a few variations between IPOs and FPOs:
Meaning
IPO represents the first issuance of shares by a company, whereas FPO involves issuing shares to raise additional capital after the IPO.
Price
IPO prices can be fixed or variable, while FPO prices are market-driven and dependent on the number of shares.
Share Capital
IPO increases the share capital, while FPO can either increase the share capital (dilutive FPO) or keep it the same (non-dilutive FPO).
Value
IPOs are generally more expensive for investors, whereas FPOs are often more affordable since they can dilute the value of the company.
Risk
IPOs are considered riskier due to the lack of past performance data, whereas FPOs are relatively less risky as investors can analyze the company’s track record.
Company Status
A company issuing an IPO is not yet listed on the stock exchange, whereas an FPO is offered by a company already listed on the stock exchange.
Take a break from reading about IPOs and FPOs and go through our article on How to Use UPI ID for IPO?
IPOs and FPOs: IPO Vs FPO Comparison
Here is a comparison between IPOs and FPOs on quite a few parameters:
Profitability
IPOs can be more profitable because investors are involved in the early stages of the company’s growth, so they can see a big increase in value. But they also come with a higher risk because investors don’t have all the info about the company right away.
FPOs, on the other hand, are less risky because they give investors access to all the important info about the company, so they can look at their track record and make guesses about how the company will grow. FPOs usually come out when the company is just starting out, so they may not be as profitable as IPOs.
Objective
The main purpose of an initial public offering (IPO) is to obtain capital from investors by offering shares to the market. Most companies choose to go public when they plan to grow and diversify their business. An FPO, on the other hand, is issued after the company has completed its initial public offering and accomplished its initial growth goals. The main purpose of a FPO is to increase the company’s equity. However, an FPO may also be used to dilute the promoters’ shareholdings.
Performance
The performance of a company is a major distinction between IPOs and FPOs, as it influences the amount of data available to investors prior to the purchase of shares. Investors in an IPO have a limited understanding of the company, as they rely on a pre-IPO document known as a Red Herring Prospectus. This pre-provisional document contains limited information about the management, debt and market interest of the company. This limited information allows investors to form a perception of the company and decide whether or not to purchase shares.
On the other hand, in a FPO, investors are provided with comprehensive information, including the company’s performance since the initial public offering (IPO). Investors can assess the past performance of the company and market interest prior to making a decision to invest. Additionally, a FPO provides investors with a signal regarding the worth of the stocks by the sale of equity stakes.
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Conclusion
IPOs and FPOs have distinct characteristics and implications for investors. IPOs offer the opportunity to participate in the early growth of a company and can potentially provide higher returns, but they also carry higher risk. FPOs, on the other hand, provide investors with more comprehensive information and are generally less risky, although they may offer relatively lower profitability. Ultimately, investors should carefully consider their risk tolerance, investment goals, and available information before deciding to invest in either an IPO or an FPO, or on both IPOs and FPOs.
