E42 What is an IPO? |आख़िर IPO होता क्या हे

It has been a season of regular news about IPOs. Many popular companies were in the news for this.

But what exactly is an IPO?

What does this change for the company?

When does a company go for an IPO?

Start your knowhow of IPOs with this episode of MoneyKiBaat

यह IPO के बारे में नियमित समाचारों का मौसम रहा है। कई लोकप्रिय कंपनियां इसके लिए चर्चा में थीं।

लेकिन वास्तव में IPO क्या है?

कंपनी के लिए यह क्या बदलाव करता है?

IPO के लिए कंपनी कब जाती है?

MoneyKiBaat के इस एपिसोड के साथ IPO के अपने ज्ञान को शुरू करें

Are there any burning questions giving you sleepless nights? Write to us at anmol@7prosper.com

Disclaimer: This podcast is for educational purposes only. Anything said should not be construed as advice. Make your investments only after consulting your financial advisor. If you're interested in our financial planning service, visit us at: www.7prosper.com

Transcript:


Hi Everyone! This is Anmol Gupta from the show "Money Ki Baat".


Recently few company's launched IPOs like CAMS, UTI MNC, Angel Broking.


But some of you must be wondering what an IPO is and why is it required. In today's short episode, I will answer these two questions. I'll make it simple for you to understand.


If you haven't subscribed to this channel, then please do subscribe to get the updates of new episodes.


To understand IPO or Initial Public Offerings, we need to first understand the way a business operates.

Investment is required to run all types of businesses. The amount of investment varies from business to business.
For example, a manufacturing company initially requires a large sum of money to set up it's factory. To start a business, a person either uses some portion of his savings or takes help from his friends or family. They can also request for bank loans. However, banks don't grant loans for start-ups so easily. Banks don't invest in risky businesses. Banks usually give loans to companies that have the potential to make impressive gains. Or if the bank gets collateral to secure it's loans.


Hence, banks do not give loans to companies with low profitability.

As a company grows, more investment is required to support it's expansion plan. Then they approach professional investors like Angel Investors or Venture Capitalists. These investors invest money in the companies by purchasing shares or equities, thereby taking ownership of those  companies.

As the company grows more in size, more capital is required for it's function in which an individual or professional investors will not be able to afford.
So companies have the option of selling their shares to public and raise money through them for supporting their expansion plans.


Not only general public like us, but big institutions like mutual funds, pension funds also invest in companies by purchasing their shares.


When a company offers it's shares to the general public or institutions for the first time, it is known as IPO or Initial Public Offerings.

Therefore, it is Initial Public Offering of company's shares.

We already discussed the 1st reason of issuing IPO, i.e, to support expansion. There are various other reasons to issue IPO as well.
Investors who had initially invested in the company like friends or family, angel investors or venture capitalists might want to sell their shares back to the company.


Lot of buyers are available in the market to purchase shares. A company can also issue IPO to clear off it's loans so that they can use the money received on selling the shares to repay it's loans.


However, well established companies can easily get loans from banks because of their high profitability. They, too, sometimes prefer selling shares to public than taking loans. This is because the companies fall under an obligation to repay their loan. Loans need to be repaid on a regular basis, whereas, they are not obligated to pay back the shareholders in this way.


Shareholders earn profit if the company's share value increases. Once you purchase IPOs, you can trade them in stock exchange like BSE or NSE.


Let's suppose, I purchased a share of 100/-. After 3 months, the value of the shared increased to 120/-. Now, if I want to sell that share, I can't sell it directly to the company. Instead, I have to sell it to another buyer in the stock market.


This is known as secondary sale.

In this transaction, company will not make any profit, but ownership of the share will be transferred to another person.


So I hope you understood the meaning of IPO. It is when a company offers it's shares to the public for the first time.

Supporting expansion plans, facilitating liquidity to it's existing investors or loan repayment are multiple reasons to issue IPO.

That's all for today. And do leave your questions in the comment section and stay tuned to Money Ki Baat.

Thank You.

Keep prospering with other episodes!