What Does An Initial Public Offering (IPO) Mean?

An initial public offering (IPO) is a technique of obtaining funds for major corporations in which the company offers its shares to the public for the first time. The company’s shares are traded on the stock market after the IPO. The following are some of the key reasons for launching an IPO: to raise funds through the sale of shares, to provide liquidity to firm founders and early investors, and to take advantage of a greater value.

While implementing the IPO technique organizations often find it difficult to understand the risk factors related to it. If you too are worried and looking for the same then you are in the right place. In this article, we are going to observe the pros and cons of the IPO technique. 

The Benefits and Drawbacks of an Initial Public Offering

The fundamental goal of an initial public offering (IPO) is to obtain funds for a company. It may also have additional benefits, as well as drawbacks.

Advantages:

One of the most significant advantages is that the firm may raise funds from the whole investing public. This makes acquisition negotiations (share conversions) simpler, as well as increases the company’s visibility, prestige, and public image, all of which can assist sales and profitability.

Increased transparency, such as that offered by mandatory quarterly reporting, can sometimes help a public firm achieve better credit borrowing terms than a private corporation.

Disadvantages:

Going public may have a variety of disadvantages, causing companies to investigate alternate choices. The fact that IPOs are costly, and the expenses of sustaining a public company are continuous and largely unrelated to other costs of conducting business, are only a few of the key drawbacks.

Because management may be rewarded and evaluated solely based on stock success rather than true financial results, variations in a company’s share price can be a source of distraction. In addition, the business must report financial, accounting, tax, and other business information. Throughout those disclosures, it may be necessary to publicly divulge secrets and corporate procedures that might benefit rivals. The tight leadership and control of the board of directors may make it more difficult to retain competent managers who are willing to take risks. It’s always possible to remain anonymous. Instead of going public, companies may look for buyout bids.  Organizations may also wish to think about other possibilities.

 

conclusion:

Over the Long-Term, IPOs are notorious for their unpredictable opening day results, which might draw investors wanting to take advantage of the discounts. Over time, the price of an IPO will settle into a stable value, which may be followed using standard stock price indicators such as moving averages. Managed funds that specialise in IPO universes are a good option for investors who want to participate in the IPO market but don’t want to risk their money on individual stocks.

by Rachel Buscall

by Rachel Buscall

Co-Founder & Managing Director at New Capital Link. Having started her career in the financial sector, Rachel demonstrated a natural flair for entrepreneurship.

New Capital Link

Alternative investment specialists offering structured opportunities across the UK & Overseas.

New Capital Link is a boutique London-based introducer that offers unique UK & global investment opportunities worldwide.

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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be very complex and high risk.

What are the key risks?

1. You could lose all the money you invest

If the business offering this investment fails, there is a high risk that you will lose all your money. Businesses like this often fail as they usually use risky investment strategies. 

Advertised rates of return aren’t guaranteed. This is not a savings account. If the issuer doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. A higher advertised rate of return means a higher risk of losing your money. If it looks too good to be true, it probably is.

These investments are sometimes held in an Innovative Finance ISA (IFISA). While any potential gains from your investment will be tax free, you can still lose all your money. An IFISA does not reduce the risk of the investment or protect you from losses.

2. You are unlikely to be protected if something goes wrong

The business offering this investment is not regulated by the FCA. Protection from the Financial Services Compensation Scheme (FSCS) only considers claims against failed regulated firms. Learn more about FSCS protection here. https://www.fscs.org.uk/what-we-cover/investments/ or

Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here. https://www.fscs.org.uk/check/investment-protection-checker/

The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here. https://www.financial-ombudsman.org.uk/consumers

3. You are unlikely to get your money back quickly

This type of business could face cash-flow problems that delay interest payments. It could also fail altogether and be unable to repay investors their money. 

You are unlikely to be able to cash in your investment early by selling it. You are usually locked in until the business has paid you back over the period agreed. In the rare circumstances where it is possible to sell your investment in a ‘secondary market’, you may not find a buyer at the price you are willing to sell.

4. This is a complex investment

This investment has a complex structure based on other risky investments. A business that raises money like this lends it to, or invests it in, other businesses or property. This makes it difficult for the investor to know where their money is going.

This makes it difficult to predict how risky the investment is, but it will most likely be high.

You may wish to get financial advice before deciding to invest.

5. Don’t put all your eggs in one basket

Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. 

A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest

If you are interested in learning more about how to protect yourself, visit the FCA’s website here: https://www.fca.org.uk/investsmart

For further information about minibonds, visit the FCA’s website here.https://www.fca.org.uk/consumers/mini-bonds