Understanding IPO and Its Advantages to Retail Investors.
IPO stands for Initial Public Offering. Therefore, this is the time when any private company can shift to being a public entity. Essentially, it is the process by which a private company first opens its shares to the public. This process does not only enable companies to raise capital, but also gives retail investors a special opportunity to partake in the firm’s growth journey. In this blog, we will get into what an IPO is and how an IPO is beneficial to the retail investor.
What is an IPO?
An IPO refers to the sale of some shares by a firm to the public for raising capital. Investment banks often assist firms in determining the price per share and the number of shares they intend to float. Once the company has floated its shares, the shares are listed on a stock exchange like the NSE or BSE in India and opened up for trading in the open market.
Benefits of IPOs for Retail Investors
- Access to Growth Opportunities
One of the primary advantages of participating in an IPO is the potential for substantial returns. Many companies go public to fund expansion, research and development, or to pay off debt. Investing in such companies during their growth phase can offer significant appreciation in stock value, translating to substantial gains for retail investors.
- Early Entry
This investment into an IPO means that a retail investor can first buy shares at the offering price at a moment in time when it usually is lower than the price once these shares start trading on a stock exchange. Naturally, this gives you an early entry opportunity, as most shares experience a significant spurt in price on listing day and even after, generating returns immediately.
- Portfolio Diversification
IPOs allow retail investors an opportunity to diversify their investment portfolio. In fact, through the addition of stock of newly listed companies, investors can disperse their risk across diverse sectors and industries. A diversified portfolio is normally stable and performs better in terms of overall performance.
- Enhanced Market Liquidity
When a firm goes public, then the shares can be sold and purchased anytime freely on the stock market. This ensures liquidity to retail investors, as they will have flexibility in entering or exiting their chosen positions based on some market conditions or financial objectives.
- Transparency and Compliance with Government Regulation
Strict regulatory requirements and high standards of transparency and disclosure apply to public companies. This implies that retail investors can rely on reliable and current information, in regard to the financial health, performance, and future prospects of the company. This is where transparency works well to help investors make proper decisions, eliminating surprise cases of financial mismanagement.
- Ownership of the Company
An investment in an IPO gives retail investors partial ownership of the company and also grants them voting rights on most significant matters, including board member elections and major corporate decisions. Though a retail investor may have a small share in the company, their collective power goes along the way in influencing the company’s governance and strategic direction.
Conclusion
Participation in an IPO can be very rewarding for retail investors as that can give them opportunities for high returns, diversification, and even participation in the firm’s future.
However, great risk consideration needs to be adhered to before going in for an IPO as they are also extremely volatile and even dicey.
If you have already participated in IPO when shares were issued in physical forms and you have such physical shares which you have been allotted in IPO then you can take help of Clearclaim to convert them into DEMAT. You can also check our blog – Advantages of dematerialization of old physical shares into DEMAT