How to Decide Between Investing In IPOs and FPOs

IPOs and FPOs are the two public offerings that companies embark on to solicit funds from public investors. The two ways may give the investors a chance to subscribe to the equity of a company, but their objectives differ. Hence, it is essential to know the difference between an IPO and an FPO for a better-informed decision-making process regarding investments in the capital markets.

What is an IPO?

The IPO, or initial public offering, is when a private company first makes shares of its stock publicly available for buying and selling to investors. In general, a company brings itself to an IPO to raise equity capital for expanding, simply reduce debt, or meet other requirements of the business. 

What is an FPO?

An FPO or follow-on public offer, is when an already-listed company places additional shares in the public domain for subscription. The primary purpose of an FPO is to raise further capital for the company on that company's second listing. 

Key Differences Between IPO and FPO

The two main aspects of difference between IPO and FPO are the territory, the timing, and the purpose of the offer. An IPO refers to an offer that the company makes for the first time to the general public; an FPO is an offer after the company has listed itself. The difference in time denotes, too, the distinction in information availability and the perceived risk.

In an IPO, investors possess little information about the financial history of a corporation because the prospectus and disclosures made at the time of the offer rely on this document. The issuer for an FPO has generally, in his or her case, a history of compliance that performance records and general public disclosures give ample data for analyzing.

The price discovery mechanism is different, too. After all, the IPO price may depend on estimates and projections about the future, whereas, in the case of an FPO, since the stock is already listed, the price depends on demand-supply forces on the exchange and the market price prevailing at the time.

How to Decide Between Investing in an IPO and an FPO?

1. Information Availability:

In an IPO, limited financial data is available to investors. The company has not been tested in the public markets as far as performance is concerned; therefore, investors might have to rely on the draft red herring prospectus and other offer documents. There is much more data on past financial reports and analyst coverage that will be visible for investors in an FPO.

2. Pricing Consideration:

IPO pricing may have an element of speculation since it is based on no market reference; generally, pricing of FPOs is made on the existing current market valuation-perhaps giving parameters of reference to the investors in order to assess the offer against their expectations.

3. Stage of Setting Up:

Generally, firms offer IPOs at the time they enter public markets for the first time. Those undergoing major change are early-stage companies, whereas well-known corporations already have FPOs. FPOs come only from public operations and are looking to scale or restructure

4. Risk Appetite:

To individuals with a low tolerance for risk, FPOs can prove appealing because they come with considerable amounts of historical data. Those individuals with a high-risk appetite may invest in IPOs, especially if he/she believe that untapped growth exists in that particular company.

5. Purpose of Capital Raised:

Hence, understanding the purpose for which the capital raised will be used is essential. In some cases, both IPOs and FPOs can support business purposes, such as expansion or debt repayment, or be used for general corporate purposes. Investors will then have to scrutinize the proceeds from the investment to see if they match the financial targets of the given investment.

6. Subscription Trends:

Oversubscription and undersubscription of an IPO affect how investors perceive a specific FPO and how it reflects upon the sentiments in the market as it relates to the issue, as well as on the expected performance of that issue. 

7. Regulatory and Market Context:

Market dynamics determine this point. Along with that, sometimes regulatory factors may be beneficial. Under conditions of stable favorability, both IPOs and FPOs gain high interest. Once the market becomes volatile and uncertain, investors will exercise caution before participating in IPOs, as they lack historical performance data.

Conclusion

The underlying distinction between IPO and FPO is about the stage of issuance. Moreover, both relate to differences in levels of availability of information for investors, pricing transparency, as well as the maturity and risk of a firm.