Advantages and Disadvantages of IPO

A private company's shares are initially made available to the general public through an "Initial Public Offering (IPO)." Smaller businesses seeking more funding conduct initial public offerings (IPOs), but larger private businesses desiring to go public can also do so. Initial public offerings allow businesses to obtain additional funds to monetize shareholder assets. "Going Public" is the broad term for the IPO process.

Although there are various advantages to considering IPO investment, there are also disadvantages. Investors must be aware of the benefits and drawbacks before making any investments.

Advantages and Disadvantages of IPO

Advantages of IPO

  • More Liquidity

Once a business goes public, investors can trade its shares in the market. This allows investors to make profits without waiting for their shares to be repurchased. Investor liquidity is increased when shares of a company are always available for purchase or sale.

  • Diversification

When companies go public, investors can trade shares on an exchange. As a result, there is more variety among investors because no single investor owns the majority of the outstanding shares in the company. As a result, having shares in a publicly listed firm allows investment portfolios to diversify.

  • Raise money

Raising capital for the company is one reason for going public. According to SEBI regulations, a company can utilize an IPO to raise 20% of its capital from the public. Any company looking to grow and achieve great things would benefit from this.

  • Advantages in the Long Run

It is likely the primary advantage of investing in an IPO, which has long drawn investors. Long-term profits on an IPO investment can be quite high. An initial public offering (IPO) investment is a kind of stock investment that can be used as leverage to accomplish long-term goals like retirement planning.

  • Build Brand Equity

Trust and credibility are the foundations of a brand. Building customer trust in your brand is achieved by publicly making a product and service available; this results in increased sales and profitability.

Through press releases & financial media coverage, companies that went through an IPO become more visible and attract the interest of potential clients and new strategic partners. Because they are required to reveal information, including the company's financial outcomes, publicly, public companies are much more accessible than private ones.

  • Increased Access to Capital Markets

Due to legal and regulatory limitations imposed by securities regulations, initial public offerings (IPOs) allow businesses to raise money from institutional investors, who are sometimes ineligible to invest in their companies as venture capitalists and angel investors.

Furthermore, publicly listed companies get access to capital that would not otherwise be available since these stock exchanges are open markets and thus are accessible to several investors through a broker and other financial intermediaries.

  • Discipline Management

Going public encourages management to prioritize profits over other objectives like development or growth. Because they cannot conceal their issues, it also makes it easier to communicate with shareholders.

  • Chance to Act Early

When a company makes its shares available to the public, this is known as an initial public offering. Investors have the ideal chance to buy into positions in the early going. IPOs can be useful for withdrawing immediate advantages in a short period. You can maintain your holdings as an investor for a long time.

  • High Return

The price you are given for investing in equity shares of a business with the potential to expand significantly is the lowest price available at the time of the IPO. The stock prices might, however, skyrocket just after the listing and enable you to realize substantial profits quickly.

  • Debt reduction for corporations

Public firms may repay the debt through IPO or future share sales to lower interest expenses, boost cash flow, and enhance debt-to-equity.

  • Employer Attraction and Retention

Companies can use stock grants & public stock option schemes to entice particular sorts of employees with lower risk tolerance. The availability of new public stock options or reduced stock purchase programs will be available to current workers.

Though entrepreneurial employees might earn bigger equity incentives as early-stage pre-IPO investors, some would rather work for larger public firms than startups.

  • Exit Availability

Shareholders have invested a lot of time, money, & resources in a company in the hopes that it will succeed. These investors and founders frequently wait years before seeing a sizable return on their investment. An IPO is a signi?cant exit opportunity for investors, which gives a chance to liquidate any invested capital or, at the absolute least, collect potentially enormous sums of money.

  • Overall capital cost reduction

Companies frequently have to pay higher interest rates when obtaining bank loans before becoming public. Obtaining additional capital is much simpler with an IPO. This is attributable, in part, to the company's frequent audits, which demonstrate its integrity. Then, lenders are more willing to offer credit lines with profitable interest rates.

Advantages and Disadvantages of IPO

Disadvantages of IPO

  • Transaction Cost

Initial public offerings cost a lot of money. One of the greatest costs connected with IPOs is the extremely high underwriter fees. The transaction expenses will increase even further if a company decides to work with a financial reporting advisor or other specialized organizations.

  • Time Consuming

You must conduct an in-depth investigation of the company & its prior success before investing in an IPO. Although it is provided in the company's prospectus, comprehending it requires effort and time.

  • The Risk of Selling Shares

Many investors nowadays want to sell their shares soon after they are listed to profit from the listing. But it's sometimes only to do the same. Selling is typically quite simple with extremely successful offerings, but in other cases, there may be uncertainty regarding the availability of potential buyers for your shares.

  • Privacy

A lot of investor data is required in the paperwork & application when applying for an IPO. It could contain information you would normally not want the public to access. You are required to offer the same, however.

  • Loss of Control

A company's founders may have less influence over its organization after an initial public offering (IPO). When a company becomes public, maintaining customer satisfaction becomes more important than ever, even though the company's founders might still hold most of the decision-making authority. Votes from shareholders and negative public perception might compel a change in leadership.

  • Additional Regulatory Disclosures and Requirements

Private Companies are free from the SEBI's yearly financial account submission requirement, although public companies are required to do so. It's expensive to prepare the statements and have them audited as part of the disclosure procedure.

  • Market Pressures

Leaders of the organization who are accustomed to acting in line with what is appropriate for the company may be negatively impacted by the pressures mentioned above. Founders emphasize the longer-term and the company's influence on the globe more than the stock market, which takes a short-term strategy where earnings are the main consideration. These two strategies may conflict with one another and cause problems.

The Conclusion

To apply for shares in an IPO, you must have a DEMAT account. An IPO could or might not be the best action for investors and companies. IPOs have a variety of benefits and drawbacks. This article does not cover all of the advantages and disadvantages of an IPO, but it does highlight many of them. When weighing the benefits and drawbacks of an IPO, it's important to be patient and consider all of your options.






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