When a business first starts out, it raises small amounts of money from venture capitalists and angel investors. As the firm grows, it will eventually need to obtain more cash in the form of stocks and debts.
The initial public offering (IPO) and follow-on public offering (FPO) are the two most common ways for a company to raise funds from the stock market. An initial public offering (IPO) is when a business generates cash for the first time by issuing shares to the public. On the other hand, FPO refers to when shares are offered for sale several times in a row.
They can be explained and differentiated on different parameters. But firstly, let us understand IPO and FPO in detail.
What is an IPO?
Initial Public Offering (IPO) is the process through which private firms or organisations sell some parts of their stake to investors for the first time to enable the firm to expand in the future. Through this transfer of stakes, a privately held organisation becomes a public organisation.
What is an FPO?
Follow-on public offering (FPO) is the process through which companies that are already listed on the stock exchange sell a part of their stake to the investors. This procedure is followed after the IPO. It is of two types - dilutive and non- dilutive. In dilutive public offering, share capital increases whereas it remains unchanged in the non-dilutive offerings.
Difference between IPO and FPO
IPO vs FPO - Risks and Returns
FPOs are considered less risky when compared to IPOs. IPOs are the first issue and investors are not well-acquainted with the financial prospects of the organisation.
Whereas FPOs are considered a much safer option as the company is already listed on the stock exchange and the investors can have a detailed study about the shareholders, management and financial areas of the company.
FPOs are generally the second or subsequent issue. IPOs, however, are expected to provide greater returns to the investors when compared to FPOs.
IPO vs FPO - Objective
The primary objective of an IPO is to maximise funds through investment by the general public. The share capital in an IPO rises as the firm issues new capital to the public in preparation for its IPO.
Whereas FPOs are generally issued for two reasons. Either to raise funds to clear off debts or to expand the business or to sell off shares privately held by individuals.
IPO vs FPO - Performance
In the case of an IPO, some Investors do not rely on the company's red herring prospectus. They subscribe to an IPO because of the company's market interest, management, and debt on the books, among other factors. Investors in this case have no information or experience with the firm.
Investors in an FPO have a track record of how the firm has fared and what market interest was like earlier. Equity stake sales may be a useful predictor of whether or not a stock is worth investing in.
To summarise, IPOs are riskier than FPOs and it is impossible to predict how an IPO would perform. As a result, it's critical to delve further into the company's prospects and fundamentals. In the case of an FPO, however, investors have a wealth of information about the firm. IPOs and FPOs, both have their respective advantages and disadvantages.
Therefore , it depends on the investors that how much risk they are willing to incur and which offering suits them the best.