Difference Between IPO and FPO

The initial few fundamental concepts that investors must learn about before they begin their stock market investments are things like IPO and FPO. Initial public offering (IPO), as well as follow-on public offer (FPO), are essentially the two ways in which a company can raise money from equity market investments. There is also the option of corporate bond issuance through which a company can raise money. Below, the difference between IPO and FPO is explained across a variety of parameters.

What Is IPO?

IPO or ‘Initial public offering’ is when a company chooses to announce that it is going public for the first time. Going public, in the world of financial markets, means that the company will now offer its shares to the public at large while also being ready to get listed on the majority of stock exchanges in the country. We have two exchanges: National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The very first time a company gets listed at NSE, BSE, or both, and offers its shares to the public for the purpose of trading, this offering is known as an IPO.

Read more at: IPO Meaning and Definition

What Does An IPO Signify For a Company?

When a company is first set up, it receives funding from investors, venture capitalists, and a variety of corporations, sometimes even the government, Once the company reaches an even larger state of expansion, and its fund dry out or become insufficient, this company then launches its IPO, goes public for the first time, and is then listed publicly on exchanges.

This means that the company will receive funding when one decides to invest in it but this also comes with a great deal of responsibility of running the company in a manner that is efficient. The goal is for shareholders to not have to run any losses. This also means increased liquidity for the company and its shareholders.

What Does An IPO Signify For Investors?

When you buy a share or any number of shares in a company, this means that you are getting partial ownership in that company. Once the company decides that it wants to go public, this also opens up many options such as employee stock ownership plans, otherwise known as ESOP. A company may offer its employees ownership in stock which also has multiple benefits like profit sharing.

What is FPO?

FPO is a follow up to the initial public offering. It is also known as a follow-on public offer which is the issuance of shares after the company has been listed on the stock exchange. In other words, an FPO is an additional issuance of shares while an IPO is simply the first issuance.

What Does An FPO Signify For The Company?

An FPO is carried out with the goal to raise additional capital as well as reduce any existing debt that the company needs to pay off. Unlike an IPO, a company can carry out an FPO in one of two ways.

Dilutive FPO:

With the aid of a dilutive FPO, a company decides to issue an added number of shares in the market which the public can buy however the company’s value will remain the same. A dilutive FPO reduces the price of the shares, while also reducing the earning per share as well.

Non-dilutive FPO:

A non-dilutive FPO takes place among the larger shareholders of the company such as the founders or board of directors. In this type of FPO, these individuals of the company sell the shares they hold privately in the market. This technique does not increase the number of shares that are available to the company, but it does increase those available to the public. Unlike a dilutive IPO, this method does not do anything to the number of shares of the company, but it does change the company's EPS.

IPO vs FPO

  • Meaning: IPO is the first issuance of shares by a company while an FPO is the issuance of shares by a company so they can raise additional capital after its IPO.
  • Price: n an IPO, the price is either fixed or variable as a range, while in an FPO the price is dependent upon the number of shares as they increase or decrease and is market-driven.
  • Share capital: In an IPO the share capital increases because the company decides to issue fresh capital to the public for its listing. In an IPO, alternatively, the number of shares can either increase or decrease depending upon the type of FPO it is. In a dilutive FPO, the number of shares increases, while remaining the same in a non-dilutive FPO.
  • Value: IPOs are oftentimes more expensive to carry out than FPOs. The reason FPOs are cheaper is that the value of the company listing its shares is getting diluted further.
  • Risk: IPOs are considered to be riskier than FPOs.
  • Status of the company: A company that is unlisted issues an IPO while a company that is already listed issues an FPO.

Conclusion

Confused about going for IPO vs FPO? The one that is worth your honest investment depends on your risk level as well as your goals. For instance, your risk levels need to be very high to invest in an IPO as you will not have many ideas about the company. Alternatively, an FPO is considered a relatively safer bet for both new investors and individual investors. Investing in an IPO requires much more research than it does to invest in an FPO.

In the case of an IPO, you are required to learn about the company’s fundamentals. It is recommended for long term investors with a good risk appetite who have faith in the company. Another key component that matters when it comes to the difference between IPO and FPO is the risk versus return component. IPOs tend to come with the potential for more money especially if the company kicks off to a good start but there are many more ‘ifs’ to this.

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