Financial Blog

From bonds to stocks, the world of investing is clearly growing in front of our very eyes. As a result, a lot of retail investors are looking for ways to invest their hard-earned money in reputable companies. However, investors may face some challenges as there are many companies that are private and are not listed on the local stock exchange.

Surely, you’ve already heard of the phrase Initial Public Offering or IPOs for short. Nowadays, many private companies are going public for the first time to raise capital from both institutional and retail investors — giving investors the chance to own shares in those companies. There are also many publicly listed companies that are offering additional shares even after their IPOs. This kind of offering is called a Follow-On Offering or FOO for short. If you’re thinking of investing in a company whose publicly selling its shares then these investment products might be for you.

We’ll be talking about the basics of IPOs and FOOs. Read more below.

What is an Initial Public Offering (IPO)?

An IPO refers to the process wherein a private corporation offers its shares to the public for the first time. An IPO allows a company to raise capital from both institutional and retail investors. The transition from a private to a public company can be an important time for existing shareholders of a private company to unlock the value and growth potential of the company. An IPO also allows investing public to participate in the offering.

What is a Follow On Offering (FOO)?

An FOO is the process wherein a publicly-listed company offers additional shares to the investing public after its IPO. There are many reasons why publicly-listed companies will offer additional shares to the public. FOOs may be undertaken to raise additional capital in order to fund the company’s business or its expansions plans, and it could also be to raise the public ownership to the minimum required level.

How do IPOs and FOOs work?

For IPO, the company may opt to issue new shares from its authorized capital stock (primary offering) or its existing shareholders may opt to sell their stake to the investing public (secondary offering). After this, the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to the company’s shareholders’ equity. The investing public consists of any individual or institutional investor who is interested in investing in a publicly-listed company.

What are the benefits and risks when investing in equity securities?

Benefits:

• Capital Appreciation – Provides investors opportunity to gain income from share price appreciation in the local stock exchange.
• Dividend Income – Provides investors opportunity to earn from to dividend declarations of the company.
• Voting rights – If an investor invests in the IPO or FOO of common shares, they are entitled to voting rights and can participate in the decision making process of the company.

Risks:

• Market illiquidity – There can be no assurance that an active market will develop for the shares and that such market will be sustained.
• Market and price volatility – Volatilities in the public market could adversely affect the prevailing market price of the shares and shareholders may experience dilution in their holdings.
• Non-payment of dividends – The company is not obligated to pay dividend to its common shareholders.

Key Takeaways

After going through the basics of IPOs and FOOs, it’s safe to say that there are a lot of opportunities in investing in IPOs and FOOs. The road to an IPO and FOO investment is a very long one. As such, investors building interest can follow developing headlines and other information along the way to help supplement their assessment of the best offering price. Lastly, you as an investor should judge each IPO and FOO according to the prospectus of the company.