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An initial public offering (IPO) is how a company sells its shares to the public for the first time. The company will usually appoint an investment bank, which will help them value their company and determine the right price for their shares.
They will then market their shares to potential investors, and, once they have enough orders, they will list their shares on a stock exchange.
What are the benefits of an IPO?
Increased liquidity
Shares in publicly traded companies are much more liquid than those in private companies, meaning they can sell them more efficiently and at a higher price.
It makes it easier for investors to sell their shares if they need to, and it also allows companies to raise capital more efficiently.
Increased access to capital
IPOs allow companies to raise capital by issuing new shares. They can use it for various purposes, such as expanding the business, funding research and development, or buying back shares from existing shareholders.
Increased transparency
Going public requires companies to disclose a great deal of information about their business, including their financial performance, management team, and governance structure. It helps investors make informed decisions about whether or not to invest in the company.
Enhanced branding and reputation
Being a publicly-traded company gives a company greater credibility and enhances its reputation among investors. It can make it easier to attract new investors and raise capital in the future.
What are the risks of an IPO?
Volatility
The price of shares in newly listed companies can be pretty volatile, especially in the early days following the IPO. It can cause investors to lose money if they sell their shares at a lower price than they paid.
Increased competition
After a company goes public, its competitors may become more aggressive in winning market share. It can put severe pressure on the company’s profitability and growth prospects.
Dilution
When a company issues new shares as part of an IPO, the ownership of existing shareholders is diluted. It can reduce the value of their shares and may not be in their best interests.
Regulatory risk
There is always a risk that new regulations or changes in government policy could adversely affect the company’s business. For example, if the government rules to tighten regulation of the financial industry, this could harm the company’s profits.
What are the different types of IPOs?
Cash IPO
In a cash IPO, the company sells its shares for cash and receives the proceeds in cash. It is the most common type of IPO and usually involves investment banks acting as underwriters.
Bookbuild IPO
The company sells its shares to institutional investors but does not receive cash proceeds in a bookbuild IPO. The investment banks will set a price for the shares, and then institutional investors will bid for them.
These IPOs are typically used by companies with a lot of goodwill or when there is a lot of demand for their shares.
What is an underwriter?
An underwriter is a financial institution that helps companies raise money by issuing and selling new shares. The investment banks that act as underwriters in an IPO are typically paid a fee for their services. They also have a vested interest in ensuring that the IPO is successful, as they will typically be allocated a certain number of shares in the company that they can sell to their clients.
What is a prospectus?
A prospectus is a document with information about a company, including its business and financial performance and its plans for the future. It is designed to help investors decide whether or not to invest in the company.
All companies on the Hong Kong Stock Exchange must file a prospectus with the exchange.
Once the prospectus is approved, the company begins to “roadshow” – that is, it travels to different cities and meets with potential investors to pitch its stock.
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