Difference Between IPO and FPO
Blog by Aliceblue News Desk
10 December 2024
7 minutes
Think about the last time you bought shares of a company, maybe through your trading app while sipping your morning coffee. What you probably didn’t think about was where those shares were coming from. Were you investing in a company entering the stock market for the very first time, or one that was simply raising more money? That’s exactly where the difference between an IPO and an FPO begins.
The key difference is simple: an IPO is a company’s first entry into the stock market, while an FPO is a follow-on issue by a company that’s already listed.
In this blog, we will dive into the differences between IPO and FPO.
What is an IPO?
An Initial Public Offering (IPO) is the process through which a company issues its equity shares to the public. The issuing company gets funds in exchange for issuing its shares, which it can use to further its business objectives.
The IPO listing time comes around once the IPO process is complete. The equity shares are then listed on stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), where they can be freely traded between investors without the involvement of the issuing company.
Types of IPO
Different types of initial public offerings allow companies to raise funds using varied pricing methods.
- Fixed price IPO: In this type, the company sets a fixed offer price for its shares before they are made available to the public. Investors know the exact price in advance, which helps them decide how much to invest.
- Book building IPO: Here, the company provides a price range rather than a single price. Investors place bids within this range, and the final issue price is decided based on overall demand and bidding patterns.
How significant is an IPO for a company?
Before we compare IPOs and FPOs, let us quickly look at the importance of an Initial Public Offering from the company’s perspective.
1. Provides access to capital
An IPO provides companies with access to a vast pool of capital from public investors. Through the process, the company can raise large sums of money for expansion, research and development, debt repayment, or other strategic initiatives.
2. Enhances visibility and credibility
Once the IPO is complete, the company gets listed on stock exchanges. This can improve the company’s visibility and market credibility, which may help it attract more customers, business partners, and skilled talent.
3. Provides liquidity to existing shareholders
An Initial Public Offering provides liquidity to existing shareholders by allowing early investors and employees to sell their stakes to the public.
How significant is an IPO for investors?
An Initial Public Offering (IPO) is a key moment in a company’s journey, and it can also create meaningful opportunities for investors.
What is FPO?
A Follow-On Public Offering (FPO) is when a company that has already completed its IPO and is listed on the stock exchanges offers additional equity shares to the public to raise additional capital. The additional shares are usually offered at the current market price. However, it may also be issued at a discount to the market price to attract more investors. In simple words, any public issue of shares that comes after an IPO is known as an FPO.
How significant is an FPO for a company?
Now that you know what these two avenues are, let us quickly look at the significance of a Follow-On Public Offering before moving on to the differences between an FPO and an IPO.
1. Access to additional capital:
An FPO enables publicly listed companies to raise additional funds without resorting to debt financing or other costly alternatives. With the additional funds, the company can bolster its financial position, pursue growth opportunities, and strengthen its balance sheet.
2. Serves as an indicator of confidence:
A Follow-On Public Offering demonstrates management’s belief in the company’s future performance and could be viewed as an indicator of confidence in the entity’s prospects.
How significant is an FPO for investors?
Similar to the level of significance of an FPO for a company, it is also significant for investors. Here are some factors that make an FPO quite significant to the investors:
1. Price advantage:
When companies launch an FPO, they mostly offer the additional shares at a discount (at a price lower than the current market price of the shares). This discount makes investing in FPOs an ideal investment opportunity to buy the shares of a company at a lower rate.
2. Financial Statements:
Unlike an IPO, an FPO provides extensive financial information. As the company is already public, investors can easily analyse its historical performance and determine whether investing in the shares will yield profits.
Key Differences Between IPO and FPO
While shares are issued to the public in both IPOs and FPOs, they differ in several factors. Below is the tabulated comparison of IPO vs FPO:
|
Particulars |
IPO |
FPO |
|
Timing |
Equity shares are issued to the public for the first time |
Equity shares are issued to the public after the company is already listed on stock exchanges |
|
Company |
Issued by privately held companies |
Issued by publicly traded companies |
|
Information availability |
Information regarding the company is not easily available |
Information on the company is publicly available and can be accessed by anyone |
|
Price determination |
The offer price is determined by the company, along with the lead managers of the issue, based on demand |
Equity shares are typically offered at the current market price or at a slight discount to the current market price |
|
Underwriting |
Always involves underwriting by investment banks |
Underwriting is generally not involved |
|
Regulatory requirements |
Subject to rigorous regulatory scrutiny and disclosures |
Regulatory requirements are less stringent |
|
Potential for higher returns |
Carries a high potential for capital appreciation |
Lower potential for capital appreciation |
|
Risk |
Carries a much higher risk |
Comparatively lower risk |
Blog by Aliceblue News Desk
The Alice Blue Team is a passionate group of analysts delivering expert market insights, comprehensive coverage of stocks, economy, commodities, and personal finance through clear, actionable research.
