All businesses need funds to finance their day-to-day operations. When a company starts its operations, they raise small funds from venture capitalists (a private equity investor that provides capital to companies with high growth potential in exchange for equity stakes) and angel investors (who invest in start-ups and young businesses by providing funding in exchange for equity/ownership shares in the business).
Eventually, as the company starts to grow, the entity raises more funds for the industry in the form of equity, which means the owned capital of the company or debt which represents the borrowed capital of the company. When funds are raised as equity, the company approaches various individuals to sell its shares at a fixed price.
There are two ways by which companies raise funds.
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 traded publicly. It is the main source of acquiring funds from the general public to finance its projects, transforming a small, closely-held company seeking to expand its business or a large privately owned firm into a publicly listed one.
Learn What is an IPO and Its Concept
FPO
Follow on Public Offer is a process by which a listed company on the stock exchange can raise capital by offering new shares to the investors or the existing shareholders. After IPO, the company goes for the further issue of shares to diversify its equity base. There are two types of FPO:
Dilutive FPO
The company issues an additional number of shares in the market, but the value of the company’s shares remains the same. This reduces the overall share price and automatically reduces the earnings per share also.
Non-Dilutive FPO
Non-dilutive FPO occurs when big company shareholders like the Board of Directors sell their privately held shares in the market. This technique does not increase the number of shares for the company, but the number of shares available for the general public increases. Unlike dilutive FPOs, since this method does not increase the number of shares, it does not affect a company's EPS (Earning Per Share) ratio.
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Difference between IPO and FPO
Objective
Company’s objective with IPO is to offer shares to the general public to expand the business. On the other hand, companies offer FPOs with the main aim of expanding their equity shareholders. Sometimes companies use this route to reduce the promoter shareholding.
Performance
Another key difference between IPO and FPO is how much investors know about the company before buying allotted shares. In the case of the IPO, investors do not have any metric to gauge a company's performance; they base their decision or judgment of a company on market interest. So, it is difficult to predict an IPO’s performance. In the case of an FPO, investors have a track record of how the company has performed and previously what the market interest was.
Once a company is listed on stock exchanges, investors get access to all the necessary information about the company. This allows them to assess the fundamentals of a company and decide whether they should go for buying its shares or not.
Profitability
Investing in an IPO is relatively riskier, but it can be more profitable than FPOs as they participate in the company's initial growth. In the case of FPO, investors will receive very low profits on their investment as a company issues FPO in its stabilization phase. So, the chances of exponential earnings are low.
Share Capital
In the case of an IPO, a company issues new shares to the general public. Hence, the number of shares increases along with the share capital. On the other hand, the number of shares and share capital may increase or remain the same depending on the type of FPO the company is issuing. If it is non-dilutive in nature, shares will increase, and if it is dilutive, shares will be the same.
Risk Factor
IPOs are risky as investments are based on assumptions and speculations. On the other hand, FPOs are less risky as the companies launching an FOI (Freedom of Information) are already established and are undergoing consolidation.
Conclusion
Both IPO and FPO are different ways of raising funds for companies. However, the key difference between IPO and FPO is in the method and timing of raising capital. Both these processes allow companies to raise money and fulfil different objectives. Investors must analyse their investment goals and go for IPO or FPO according to the same.
IPOs are more profitable than FPOs but are slightly risky, and risk-averse investors may not enjoy putting their money in them. Investors must go through all available information about a company before using their hard-earned money to subscribe to them.