A Company goes to the share market to raise capital have money for growth or have money to pay off the debt. A company can raise money by Initial public offering(IPO), Follow on public offer(FPO), or Right issue. So In This Article, We will understand Why do Companies Issue Shares and How to invest in them.
A Company uses an initial public offer(IPO) to raise capital for the first time from the stock market. The follow-on public offer(FPO) is offered to the public by the already listed companies in the stock market to again raise money from the public.
The right issue is offered to the existing shareholders as gratitude for their long-term association with the company. Now let’s learn Why do Companies Issue Shares?
Why Company issue Shares?
A Company going to the market for the following purposes.
- To raise capital
- For growth
- To pay off debt
A company goes to the public to lessen the depth and raise new capital. The owner tells the public about his company and the efforts he made to bring the company to the position.
Now, It is required that you all should come together and invest in the company. Your investment will help in the growth of the company and you all will be shareholders of the company.
If you would have invested 10,000 every month in Hindustan Unilever Limited for 26 years from the year of its Inception that is 1994 to the year 2020, then your investment would have been 28 lakh and 80 thousand.
If Somebody would have invested Rs. 10,000 in Wipro in 1981. Then the present value of those shares is approximately 600 crore. During the period the investor also receives a dividend of approximately 125 crores.
The investor receives so much dividend that the 10,000 investment got recovered with hug profit and still, they have Rs 600 – 700 Crore shares with them. This is the strength, You get when you invest in the stock market.
Now you got an idea Why do Companies Issue Shares? So Let’s learn further article…..
How does a company raise money?
A company has the following three routes to raise money.
Initial public offering(IPO):- It is the first time company comes to the market to raise money.
Follow on public offer(FPO):- The company is already listed and it again comes to the public for raising the money.
Right issue:- The listed company approaches the existing shareholders to raise the money.
What is IPO in Stock Market?
What is IPO:- IPO means when a private company turns up into the public. The company for the first time(initial) offers its shares to the public. It offers shares to the public in exchange for money.
The money will be used for the investment and growth of the company. A new young company or an old company doing business for the past 10 to 15 years can also decide to get listed on the stock exchange.
You might have heard about so many famous IPOs that come to the market.
For Example, (IPO Reliance Power)
In the year 2008, A famous Reliance Power IPO has launched. Numerous people especially open their Demat accounts to subscribe to the Reliance Power IPO.
Rossari Biotech Limited is working since the year 2003. It launched the IPO in the year 2020.
A company doesn’t need to bring the IPO within two or three years of its start. Offering the IPO depends upon when the company requires money or capital. The company offers IPO in the market as per their investment requirements.
Why does a company go for IPO?
Reasons, Why a company goes for IPO, are as follows:
The company gets the capital/money from the public. A company can grow and improve business with that money. The shares of the company or openly traded in the market. It means anybody can sell or purchase the shares whenever required.
Any investor who wants to do bulk buying of shares can do it directly from the market. The liquidity of the transactions of shares gets improved. The employees of the company have a stock option that is ESOPs can sell the shares in the market to earn money.
You might hear that a company InterMESH limited. was listed its brand as IndiaMART. All the shareholders and employees of IndiaMART can now sell the shares in the open market after its listing on the share market.
The brand gets success and credibility. You get the chance of ringing the stock exchange bell as an owner of the company. IPO has prestigious and glorious importance.
The listed company can go for mergers and acquisitions. It can also acquire other companies or get acquired by other companies.
The money raised through IPO can be used for:
- Future growth
- Pay off the debt
If the promoters want to fulfill some personal dreams, Then they can also sell their shares. Now you understand “Why Company issue Shares?”
Why should you invest in an IPO?
You should invest in IPO after knowing the following:
- About the company
- Problems in the company
- Benefits of the company
Rossari Biotech Limited offers its shares at Rs. 425 per share. On a listing day, It was listed in the stock market, Its price rose to Rs. 740 per share.
If you would have bought 10 shares at Rs. 425, Then you would have an approximate profit of Rs. 3000. So, In this way, you get the benefit when a company performs well.
Its opposite could also have happened If the company would have listed at Rs. 300 per share then you would have a loss of Rs. 1250.
You need to check the following in IPO:
Red Herring Prospectus:- It is the birth chart of a business, It covers the following information starting from its Inception till the date: Business
- Profit and Loss
- Balance Sheet
- Number of Companies
- Litigations against the owner
- Litigations against the company
- Future plans of the company
Under Writer:- You have to check for the underwriter of the IPO. It means to know about the investment banker of the company. It may have the following names:
- JP Morgan Chase
- Morgan Stanley
- JM Financial
- Motilal Oswal
The above-mentioned and many others work as merchant bankers/Investment bankers and help a company in its IPO.
Loan on the Company:- You also need to check the loan of the company to check its strength. A huge amount of loans may be problematic.
Financial Advisor:- You should go to a financial advisor. He/She will tell you about the following:
How to participate in an IPO?
Which IPO is suitable for you to participate in?
Which IPO is not suitable for participation?
Read articles and blogs:- You should also read the articles and blogs on Google.
Check the Moneycontrol website: A lot of articles and blogs are posted on moneycontrol.com. They tell about the IPO you need to subscribe to end the features of IPOs. You can take decisions based on that.
What is FPO (Follow-on Public Offer)
A company can use FPO to raise money again from the market. Initial Public Offering is done by companies that exit but are unlisted in the stock market. FPO can be done by those companies which are already listed on the stock exchange and FPO comes after IPO.
FPO can be offered consecutively to the customers. Generally, FPO is offered at a slightly discounted price as compared to the prevailing market price of shares. This is given because the company wants to entice the public to buy the company shares.
Why does a company go for FPO?
- Regulatory requirement: It involves the following: Sometimes FPO is done to fulfill the regulatory requirements. The regulator restricts the ownership of shares by the company owners. So, The owner sells the company shares. This makes them go for FPO.
- More Fund required:- When the company feels that more funds are required so they go for FPO.
- More shareholders needed:- If the company feels the need for more shareholders, then it goes for FPO.
How to Investment in an FPO?
You can decide on investing in FPO by considering the following things:
- Check the documents of the company.
- Take advice from a Financial adviser or Risk advisor.
- Check the past performance of the company as it is already listed company.
You will be confident as the investment would be less risky.
For Example:- If Larson & Toubro offers the FPO, Then you already know that it has been well performed. So you can subscribe to its FPO.
What is Right Issue of Shares?
This is also a way for the company to raise money for the second time. The company provides rights to the existing shareholders by providing them additional shares in proportion to the shares held by them at a discounted price.
Reliance Industries Limited recently offered the right issue. Suppose you have 1000 shares of Reliance then Reliance may provide you with 300 more shares as a Right Issue. This will be at a discount of 20% on the prevailing market price.
Investors in the rights issue feel that the company is providing discounts and it is taking care of investors. This is the gratitude of the company towards the investment made by shareholders and investors.
Investors have the right to subscribe to the Right Issue but If they do not want, Then they should not accept the offer.
The company can also raise fresh capital through the right issue because only existing shareholders can purchase those shares and nobody else in the market. You have to decide to take the rights issue or not by your self-intelligence or with the help of a financial advisor.
Whenever you decide to invest in IPO, FPO, or right issue, You should consider the following:
- Analyze Trends
Take advice from the financial advisor to have the right guidance about the investment.
Do investment in the IPO of a company after knowing about it, Its problems, and its benefits.
Check the past performance of a company before purchasing FPO.
Take advice from a financial advisor before opting for the right issue offered by the company.
I hope you understand very well “Why do Companies Issue Shares and What is IPO in Stock Market“. So If you like this article, please share it with your friend circle.