IPO Vs FPO: What is the Difference Between IPO and FPO | Espresso

Difference Between IPO and FPO

The concepts of IPO and FPO should be clear to the investors looking forward to beginning investments in the Indian stock market. The IPO and FPO full form are Initial Public Offering and Follow-on Public Offering, respectively. If we compare IPO and FPO, we will see that these are two fundamental ways a company can raise money from the equity market.

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Below, we will get into the details about IPO, FPO, IPO vs FPO and how you can benefit from IPO as an investor.

What is an IPO?

IPO is the acronym of Initial Public Offering. It is a process by which a private limited company goes public by issuing its shares to the individual investors in the share market for the first time. The company which issues its share in the market is termed as an 'issuer', and it carries out the whole process with the help of investment banks. Once the whole process of IPO is done, the company's shares are then traded in the share market.

The primary reason behind a private company going for an Initial Public Offering is to raise funds. By doing so, the company collects money from the market to grow its business successfully.

What is an FPO?

FPO stands for Follow-on Public Offering. It is a process by which the company already listed in the share market issues shares to all the existing shareholders of the ‘issuer’ company or new investors.

The reason behind a company going for an FPO is to expand its equity base. Also, a company can use FPO only after it has started the process of an IPO. To put it simply, FPO is an added issue of shares, while an IPO is the first issue.

An issuer raises an FPO for two definitive reasons:

  • To lessen the debt which is existing in the company.
  • To raise additional finance for the company.

Key Difference between IPO and FPO

There are three major differences between IPO and FPO. Let’s check out what they are:

1. IPO vs FPO – Sole Idea

The main objective of an IPO is to raise money from the investors by selling the shares in the share markets for the general public. This way, the issuer company can grow and expand its business. Once it’s done and the company achieves its goal of getting the funds it needs to grow its business, it might need additional finance. And this is where FPOs come into existence.

The primary objective of an issuer company to go for an FPO is to expand its equity base. However, sometimes FPOs can also be issued to reduce the shareholdings of the company.

2. IPO vs FPO – Performance

Performance is a huge difference between IPO and FPO. This states how much information or knowledge an investor has about the issuer company before buying its allotted shares. In an IPO investment, the investor has to go through a preliminary agreement by the company, which is known as the ‘Red Herring Prospectus. As investors might not have any central idea about the company they are investing in, they usually perceive based on their management debt books, market interests, etc.
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In an FPO, an investor usually has all the essential data about the company, a track record of the share market interest before, and how the issuer company’s IPO performed in the past. Also, investors can get signals about whether to invest in its stock or not through the sales of equity stakes.

3. IPO vs FPO – Viability

An IPO can provide higher returns for an investor and can turn out to be a profitable investment. This is because the investors can be a part of the issuer company's growth. FPOs, on the other hand, are less risky since all the important information regarding the issuer company becomes already available to the investor.

With an FPO, the investor gets a chance to analyze the company's performance in the past. And based on that, the investors can invest money in its shares in the market. However, FPOs are less profitable than IPOs. This is because, as the stage when the FPOs are offered, the company already reaches a stabilization stage.
Also Read: IPO vs NFO

Conclusion

While an investor can never really know how an IPO would perform, he needs to dig deeper into the prospects of the issuer company. However, with an FPO, the investor can have more data to make a well-informed investment decision. And now that you are aware of what an IPO, FPO is, it’ll essentially be easier for you to choose between the two.

Frequently Asked Questions

IPO is a process by which a private limited company goes public by issuing its shares to the individual investors in the share market for the first time.

FPO is a process by which the company that’s already listed in the share market issues shares to all the existing shareholders of the ‘issuer’ company or to new investors.

IPOs can provide higher returns for an investor and can often turn out to be more profitable than FPOs. This is because investors take part in the investment during the starting growth of the issuer company.

On the contrary, FPOs tend to have less risk than IPOs. This is because the investor can avail all the information about the company by the time it invests in an FPO.

The primary objective of an IPO is to raise money from the investors by selling its shares to the general public in the share market in order to grow and expand the business.