When a company starts its operations, they raise small funds from venture capitalists and angel investors. Eventually, as the company starts to grow, the entity raises more capital in the form of equities and debts.In equity, When a company raises funds by allotting shares for the first time, it is called an IPO.While on the other hand, when the shares are offered for sale for consecutive times it is called FPO.The terms IPO and FPO are often used in the stock markets. So, let us understand what is IPO and FPO with a simple example.Let’s say Mr Zee owns Zee Bookstore in the southern parts of India. Since the last 20 years, Zee Bookstore has become a strong brand as he has a unique collection of ancient books.Mr Zee thinks of expanding his business and decides to raise money by issuing shares of Zee bookstore. As a result, he can open more stores in Northern India where more people can explore his collection.With the money raised through the IPO, Mr Zee builds up 4 stores in 4 major cities and his business becomes more profitable ever since. After 3 years, Zee Bookstore has a strong brand image in the southern and northern parts of India and Mr Zee thinks to expand his business in Eastern part of India as well.But Mr Zee had already raised fresh capital through an IPO 3 years back!Now how does he raise more capital?He decides to issue new shares to the individual investors and raise more capital in the form of FPO (Follow on Public Offer).As Zee Bookstore is already listed on the stock exchange, he will have to issue additional shares of the company which will diversify its capital base.Let’s start with understanding the meaning of IPO and FPO in detail.
What is an IPO?
IPO stands for ‘Initial Public Offer’. When a company raises funds by allotting shares to the general public for the first time, it is called an IPO. It is the main source of raising capital from the general public and the company allots shares to the investors in return.[Suggested Reading: IPO Investment Guide For Beginners]
Watch this video to understand, What is IPO, and How to Invest in it,
What is an FPO?
FPO stands for ‘Follow on Public Offer’. FPO is a process by which a listed company on the stock exchange can raise capital by offering new shares to the investors or the existing shareholders of the company.FPO is raised for these two purposes:
To raise additional capital
To reduce existing debt
Types of FPO
1. Dilutive FPO
In a dilutive FPO, the company issues additional number of shares in the market but the value of the company’s shares remains the same!This reduces the overall share price and automatically reduces the earnings per share also.
2. Non-Dilutive FPO
Non-dilutive IPO takes place when big shareholders of the company like the board of directors sell their privately held shares in the market. This technique does not increase the number of shares for the company but the number of shares available for the general public increases. Unlike dilutive FPOs, since this method does not increase the number of shares, it does not affect a company's EPS ratio. Since we have learned above what is an IPO and what is FPO with types and examples. Now let us understand the difference between IPO and FPO.
Difference Between IPO and FPO
1. IPO vs FPO - Objective
The objective of an IPO is to raise capital by opening up ownership of shares of the company to the public. After an IPO, as the company grows, it may need more funds for expansion that’s when FPOs are issued. The objective of an FPO is to diversify public ownership. It may also be issued to dilute promoter’s shareholding.
2. IPO vs FPO - Performance
Another key difference between IPO and FPO is how much an investor knows about the company before buying allotted shares.In case of an IPO, all that investors have to go by is the company’s red herring prospectus. Most investors prefer to subscribe to an IPO based on market interest in the company, management, debt on the books, etc. Here investors have no guidance or track record about the company. In the case of an FPO, investors have a track record of how the company has performed and previously what the market interest was like. The sales of equity stakes can be a good indicator of whether or not the stock is worth buying.
3. IPO Vs. FPO - Profitability
Investing in an IPO is relatively riskier but they can be more profitable than FPOs as they participate in the initial growth of the company. FPOs are relatively less risky than IPOs since there is more transparency and available information about the company with the investors. Investors can study the company's past performance and make assumptions about the company's growth prospects before investing. FPOs are relatively less profitable than IPOs as in the FPO stage, the company is stabilising.
Comparison Chart Between IPO and FPO
Characteristics
IPOs
FPOs
Meaning
A private company sells equity shares to the public for the first time.
A company which is listed on the stock exchange can bring up FPOs after the launch of IPOs for subsequent public investment.
Full-Form
Initial Public Offering
Follow-on Public Offering
Issuer
Unlisted private firms
Listed public limited companies
Objective
Raising capital for the first time through the general public.
Raising funds through subsequent public investments.
Risk
Higher than FPO
Lower than IPO
Profit
Higher than FPO
Lower than IPO
Predictability
Less predictable than FPOs
More predictable than IPOs
Types
Equity and Preferred shares
Dilutive and Non-Dilutive
Example of 2020
Mazagon Dock Shipbuilders Limited, Antony Waste Handling Cell Ltd.
Yes Bank, ITI Ltd
Conclusion
To sum up, IPOs are more profitable than FPOs as they are riskier and there is no way of knowing how an IPO will perform. Hence, it is essential to dig deeper into the prospects and fundamentals of the company. On the other hand, investors have a lot of information about the company in case of an FPO. As an investor, you must analyse the purpose of issuing an FPO and make a well-analysed decision of whether you want to invest in the company’s future or not.Apart from these, you also need a trustworthy and reputed broker like Samco who provides unbiased views on IPOs and FPOs. Samco also provides a robust trading platform through which you can apply for IPOs without any paperwork.So, Open a Demat account with Samco and take part in the upcoming IPOs and FPOs of 2021![Recommended reading: 10 Tips and Strategies of investing in IPO]
The author has done a Bachelors in Banking and Insurance (BBI). She is a budding financial content writer. Her strength lies in simplifying financial jargons. Her goal is to help readers make better investment decisions.
Easy & quick
Leave A Comment?