IPO – What is it, definition and concept | 2022

The IPO is the decision by which a company decides to issue shares within its capital stock (shares) and list them on the financial market. This is an important milestone for any business organization.

That is, an IPO means that a firm will start trading its shares on the stock market. You can refer to the first time you do it, or to a new issue.

We must remember that, to obtain more resources, a company can ask for greater contributions from partners or seek external financing. If you opt for the second, you can go for debt with third parties (such as a bank or private lenders) or you can open your share capital to receive new partners. It is by choosing this last alternative that the company decides to go public.

Another relevant point to clarify is that each share is a stake in the company. That is, whoever buys the share becomes the owner of a part of the firm. However, unless many shares are acquired, the new partner has a minority interest. Therefore, his influence on business decisions is minimal or non-existent.

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To go public, the company usually uses an intermediary, usually an investment bank. Said entity, among other tasks, advises on the calculation of the price at which the shares must be listed.

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IPO modalities

There are mainly two types of IPO:

The difference between the OPV and the OPS is that the second implies an increase in the capital of the company. That is, the current partners agree to allow the entry of new shareholders.

Now, we can also distinguish other modalities to issue shares:

  • Direct public offer: It allows listing on the stock market without requiring an intermediary. Instead, the titles are offered directly to the public.
  • Dutch auction: The issuing company will lower the price of the shares offered until it receives the number of purchase requests that it has set as its objective. In the end, all buyers should pay the last price, the lowest. To better understand how this mechanism works, read the following article, in the third subtitle, where we add an example:

Advantages and disadvantages

Among the advantages of an IPO we can highlight:

  • The company opens access to new investors who can contribute their capital. Thus, the firm obtains resources to implement expansion plans.
  • It is a way to gain recognition. With the IPO, the firm can capture the attention of more public.
  • Unlike the acquisition of debt, it does not demand the payment of interest.

However, there are also some disadvantages:

  • The company becomes public, not in the sense of belonging to the public sector or the State, but rather its financial information becomes the domain of the entire market. The idea is to offer transparency to investors (or potential partners). However, from the broadcaster’s point of view, this can create conflict, by having to reveal certain information that it would prefer to keep secret, for example, before its competition. This, when it comes to issues related to business strategy or sensitive data.
  • The IPO process involves a cost, usually having to hire an investment bank as an intermediary, as we have already mentioned.
  • A firm that wants to go public must meet several requirements, in terms of a minimum volume of share capital and issuance (which in each stock market). In addition, you must follow certain practices regarding your corporate governance and, in general, in the conduct of the business.
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