IPO, FPO and Bonds - Investment Fundamentals, Investing in Stock Markets | Investing in Stock Markets - B Com PDF Download

Definition of IPO

Initial Public Offering, shortly known as IPO is the first public offering of equity shares of a company going to be listed on the stock exchange and publicly traded. It is the main source of acquiring money from the general public to finance its projects and the company allots shares to the investors in return. It is the turning point in the lifecycle of the company; that transforms from a small closely held company, which seek to expand their business or large privately owned firms to a publicly listed one.

There are two ways in which IPO can be done, firstly when the fresh issue of shares takes place, resulting in injection of fresh capital to the company. Secondly, when existing shares are offered for sale, wherein no infusion of capital takes place because the amount received as proceeds from the issue of shares go to shareholders who offer their shares for sale.

Certain eligibility conditions are required to be fulfilled by the company so as to make an IPO. Guidelines specified by the Securities and Exchange Board of India (SEBI) and Company Act need to be complied by the promoters of the enterprise.

Definition of FPO

FPO, an acronym for Follow-on Public Offering, as the name suggests it is the public issue of shares to investors at large, by a publicly listed company. The process is after an IPO; wherein the company goes for a further issue of shares to the general public with a view to diversifying their equity base. The shares are offered for sale by the company through an offer document called prospectus. There is two type of Follow-on Public Offering:

• Dilutive offering
• Non-Dilutive offering

​Key Differences Between IPO and FPO

The difference between IPO and FPO can be drawn clearly on the following grounds:

1. Initial Public Offering is a process through which privately owned companies can go public by offering their shares for sale to general public. Follow-On Public Offering refers to a process in which publicly owned companies can make further issue of shares to the public through an offer document.
2. IPO is the first public issue of the company’s shares. On the other hand, FPO is the second or third public issue of the shares of the company.
3. IPO is the offering of shares by an unlisted company. However, when a listed company makes the offering it is known as Follow-on Public Offering.
4. IPO is made with an aim of raising capital through public investment. Unlike FPO, made with an objective of subsequent public investment.
5. IPO are comparatively riskier than FPO. It is because in IPO the individual investor is not known, of what can happen with the company in future, while in the case of FPO, the investor already has an idea about company’s investment and growth prospects.​

Comparison Chart

Conclusion

There are many companies, for whom their IPO is their last public issue. However, with the expansion of business they are likely to make further issue of their stocks, with the help of FPO. In finer terms, the first public issue of the company is called IPO whereas the subsequent public issue of shares by the same company is called FPO.

Bonds : A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.

There are four major bond types in the U.S. markets, which are represented by four major issuers:

How It Works (Example):

When an investor purchases a bond, they are "loaning" that money (called the principal) to the bond issuer, which is usually raising money for some project. When the bond matures, the issuer repays the principal to the investor. In most cases, the investor will receive regular interest payments from the issuer until the bond matures.

Different types of bonds offer investors different options. For example, there are bonds that can be redeemed prior to their specified maturity date, and bonds that can be exchanged for shares of a company. Other bonds have different levels of risk, which can be determined by its credit rating.

Bond rating agencies like Moody's and Standard & Poor's (S&P) provide a service to investors by grading fixed income securities based on current research. The rating system indicates the likelihood that the issuer will default either on interest or capital payments.

Why It Matters:

Bonds and other fixed-income securities play a critical role in an investor's portfolio. Owning bonds helps to diversify a portfolio, as the bond market doesn't rise or fall alongside the stock market. More important, bonds are generally less volatile then stocks, and are usually viewed as a "safer" investment.