Subscribe for real-time financial insights on Trade Target’s WhatsApp Channels
When companies need capital to grow or expand, they turn to the stock market. Two common ways to generate capital are Initial Public Offerings (IPOs) and Follow-on Public Offerings (FPOs). The IPO vs FPO comparison highlights how both are public offerings of shares but serve different purposes and occur at different stages in a company’s journey.
For investors, understanding the difference between IPO and FPO is important. It not only helps in making smarter investment decisions but also gives better insights into a company’s financial strategy and growth outlook.
In this blog, we’ll break down the meaning, types and differences between IPOs and FPOs, helping you understand how each works.
IPO or Initial Public Offering, is the process through which a private company offers its shares to the general public for the first time. By launching an IPO, the company goes public and gets listed on stock exchanges like Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). This allows investors to buy shares and become part owners of the company.
Going public through an IPO helps a company raise capital from the market, improve its brand visibility and provide liquidity to early investors. For retail investors, it presents an opportunity to invest in a company at the beginning of its stock market journey.
Types of IPOs
Broadly, there are three types of IPOs.
- Fixed Price IPO: In this type, the company sets a fixed share price before the issue opens. Investors know the exact price they need to pay, making it easy to evaluate the offer.
- Book Building IPO:Here, the company sets a price band instead of a fixed price. Investors place bids within this range and the final price is determined based on investor demand.
- Dutch Auction IPO: In this model, investors quote how many shares they want and the price they are willing to pay. The final issue price is the highest price at which all shares can be sold. Dutch Auction IPOs concept exist globally, not used in India.
What Does an IPO Mean for a Company?
IPO is a major step for any company. IPO helps the company raise large amounts of capital from retail and institutional investors. The money raised through the IPO can be used for business expansion, paying off debts, launching new products or improving infrastructure.
Going public also brings more visibility and credibility to the company. Being listed on a stock exchange builds trust among investors, customers and business partners. However, with public money comes responsibility. The company must now follow stricter financial reporting rules, maintain transparency and keep shareholders informed. It also needs to perform consistently to maintain investor confidence and long term market reputation.
What Does IPO Mean for Investors?
For investors, IPO presents a chance to invest in a company during its early public stage. Investing in an IPO can be rewarding if the company performs well after listing. Investors may benefit from listing gains and long term value appreciation. IPOs also give retail investors access to growing companies that were previously privately held.
In addition, some companies offer ESOPs (Employee Stock Ownership Plans), which allow employees to invest in the company and become shareholders. This helps employees feel more connected to the company and encourages them to work towards its success.
For investors, IPO is not just a buying opportunity, it’s a way to participate in a company’s journey from private to public and potentially earn returns over time.
FPO or Follow-on Public Offering, is when a company that is already listed on the stock exchange issues additional shares to the public. It is like a second opportunity for investors to buy shares after the company’s initial public offering (IPO).
Companies usually go for an FPO when they need more funds to expand their business, reduce debt or support new projects. Just like in an IPO, investors can apply for these new shares during the FPO period.
Issuing more shares through an FPO increases the total number of shares available in the market, which may influence the stock’s price depending on demand and supply.
Types of Follow-on Public Offers (FPO)
There are mainly two types of FPOs, Dilutive and Non-Dilutive. Each type has a different impact on the company’s existing shares and earnings.
- Dilutive FPO: In a dilutive FPO, the company issues new shares to the public. This increases the total number of outstanding shares. Since the company’s net income stays the same but the number of shares increases, the earnings per share (EPS) reduce. As more shares enter the market, the stock price may also decline. This type of FPO is generally used by companies that want to raise fresh capital to fund growth or repay debt.
- Non-Dilutive FPO: A non-dilutive FPO happens when existing shareholders, like promoters, founders or board members, sell their personal holdings to the public. In this case, the company does not issue new shares, so the total number of outstanding shares remains the same. As a result, there is no impact on EPS or the company’s valuation. This type of FPO is often used to improve stock liquidity in the market or to allow early investors to partially exit their investment.
What Does an FPO Mean for a Company?
For a company, FPO is a move to raise additional capital from the public. It indicates that the company is already listed on a stock exchange and is now planning to issue more shares to fund its next phase of growth. The money raised through an FPO can be used for expanding operations, launching new projects, reducing existing debt or strengthening the overall financial health of the company.
FPO also helps improve the company’s market presence and credibility. By offering more shares to the public, the company not only brings in more investors but also signals confidence in its long term business plans.
What Does an FPO Mean for Investors?
For investors, FPO brings a fresh opportunity to invest in a company they already know. Since the company is already listed, investors have access to its stock performance history, financial reports and market reputation. This makes analyzing the company and making an informed decision much easier compared to an IPO.
Investing in an FPO can be beneficial if the investor believes in the company’s future growth. It allows both existing and new investors to buy shares at a price that is often lower than the market rate. FPO gives investors another chance to be part of the company’s future journey.
IPO vs FPO: What’s the Difference?
While both are ways to raise capital, the key difference between IPO and FPO lies in their purpose and the stage of a company’s growth at which they occur.
| Aspect | IPO | FPO |
|---|---|---|
|
Meaning
|
A company sells its shares to the public for the first time and becomes listed on the stock exchange.
|
A company that is already listed offers more shares to the public to raise additional capital.
|
|
Purpose
|
To raise capital from investors for the first time.
|
To raise extra funds for expansion, debt repayment or other business needs.
|
|
Price Discovery
|
Price is either fixed or set within a price band (book building).
|
Price depends on current market value and may vary.
|
|
Share Quantity
|
New shares are issued, increasing the total number of outstanding shares.
|
Shares can be newly issued or existing shareholders may sell
|
|
Cost
|
Involves higher costs due to regulatory, legal and underwriting processes.
|
Generally cheaper, as fewer compliance steps are involved.
|
|
Timing
|
Happens when a private company becomes public for the first time.
|
Happens when a public company wants to raise more capital.
|
|
Risk Level
|
Risk is higher due to lack of market history or past performance.
|
Less risky as the company is already listed and has some track record.
|
|
Company Status
|
Offered by a company that is not yet listed on stock exchanges.
|
Offered by a company that is already publicly traded.
|
|
Process Complexity
|
More complex with stricter regulations and compliance norms.
|
Simpler process with reduced paperwork and legal hurdles.
|
Final Words
IPO is the first step for a company to enter the stock market, while an FPO allows an already listed company to raise additional funds. Knowing the differences between IPO and FPO helps investors assess opportunities, understand risks and make smarter investment choices based on company stage and purpose.
Frequently Asked Questions
Which is better, IPO or FPO?
It depends on your investment goal. IPOs offer early entry but carry risk, while FPOs offer stability as the company is already listed with some market performance.
What is the meaning of IPO?
IPO or Initial Public Offering, is when a private company offers its shares to the public for the first time and gets listed on the stock exchange.
How does FPO work?
In an FPO, a listed company issues additional shares to raise more capital. It can be either dilutive (new shares) or non-dilutive (existing shareholders selling).
Which is profitable – IPO or FPO?
IPOs can offer high returns if the company performs well post listing but they are riskier. FPOs are generally more stable but may offer limited short term gains.
How does FPO differ from IPO?
IPO is the first time public offering of a company, while FPO is a second offering by an already listed company to raise more funds through the stock market.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
