February 8, 2025

IPO Full Form: What is it and Why Do Companies Opt for an IPO? 

If you are about to open a demat account, then you need to learn IPO’s full-form and also how to invest in such offerings. The term “IPO” stands for “initial public offering.” When a private company offers its shares to the public for the first time to raise capital, it is called an “IPO.”

As it is the first time a company offers its shares to the public, it is called an “initial public offering.” Having understood IPO full form, let us discuss why companies opt for an IPO.

Benefits of an IPO for Companies

1. Helps Them Raise Capital

Suppose a company cannot approach the public to raise capital, what options does it have to raise finance? Its promoters can invest more capital in it or it can approach a few institutional investors to ask for finance. However, there is a limit beyond which a company’s promoters cannot fund its expansion. Moreover, financial institutions too may or may not offer it finance. Hence, most companies, if they intend to become big, end up approaching the public to raise capital through an IPO.

2. Opens The Doors Of Organic And Inorganic Growth

When companies raise capital through an IPO, it helps them grow through organic and inorganic routes. Typically, companies plow the capital into their business (e.g., by starting a new plant or by entering new markets), which is the organic route. However, at times, companies use the capital thus raised to take over smaller firms in their sector, which comes under the inorganic strategy of growth.

3. Enables Companies To Market Their Products/Services

An IPO requires companies to meet investors in all major financial centres of India. Besides, it requires them to provide important financial and operational information about their performance in a prospectus. As companies provide more information, IPOs help them spread the word about their products and services, which can enable them to improve their market share.

4. Allows An Exit Opportunity To Early-Stage Investors

When a company announces an IPO, it allows its early-stage investors (typically, promoters) to sell some or all of their stake. While it is perfectly fine for a promoter to sell some of his stake, investors should exercise caution if a promoter wants to significantly reduce his share in a company. When a promoter does not want to stay invested in a company, it could mean that he does not have confidence in the prospects of that company. If this is indeed the case, investors should not invest in such a company.

5. Allows Companies To Become More Transparent

The Securities and Exchange Board of India (SEBI) requires companies to follow stringent rules and regulations when they announce an IPO. For example, IPO-issuing companies are required to provide detailed financial and operational information about their business. They also need to disclose the information about their promoters. Such disclosures help improve the transparency of a company.

6. Improves The Liquidity Of A Company’s Shares

After a company announces an IPO and its shares get listed on a stock exchange, the liquidity of its shares improves. When shares are listed, all kinds of investors (whether institutional or retail) can buy them by just logging into their online trading account, which improves their liquidity. As more people buy and sell a company’s shares, it helps in finding a realistic value of those shares.

Conclusion

IPOs can be a great starting point for an investor to understand how the stock market functions. If you have just begun investing, you should learn about all the stages of an IPO (e.g., how a company hires an underwriter, how an IPO is priced, the IPO allotment process, etc.).

As you learn about IPOs, your understanding of the overall financial market will improve, which will help you make better investment decisions.

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