Initial public offering Assignment Help

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Initial public offering(IPO):

Initial Public Offerings (IPOs) are the first time a company sells its stock to the public. Information regarding a public offering is available in the prospectus. The prospectus is a document that by law has to be furnished to each investor. When a company decides to issue a new security, it can sell it as a public issue or private issue. There are two types of public issues: the general cash offer, where equity issue is sold to all interested investors; and the rights offer which is an offer that gives a current shareholder the opportunity to maintain a proportionate interest in the company before the shares are offered to the public. All IPOs are cash offers because if the firm's existing shareholders wanted to buy the shares, the firm would not need to sell them publicly. The securities involved in a public offering can be classified into two groups, known as the seasoned and unseasoned securities. The seasoned securities are those that are more of a type already in the market. For example suppose Infosys has shares already in the market. It later makes a public offering in the primary market of many shares because it has a need for capital. These additional shares offered would be seasoned securities. In contrast to seasoned shares, unseasoned securities are those that are being offered to the public for the first time. These are the initial public offerings. There is no established price for them. The offer price is negotiated between the issuing firm and investment bank.

Sometimes IPOs are associated with huge first-day gains; at other times, when the market is not receptive, they fail. It is often difficult for an individual investor to realise the huge gains, since in most cases only institutional investors have access to the stock at the offering price. By the time the general public can buy and sell the stock, most of its first-day gains have already been made. However, an informed investor should still watch the IPO market, because this is the first opportunity to buy these stocks.

When a privately held corporation needs to raise additional capital, it can either take on debt or sell partial ownership. If the corporation chooses to sell ownership to the public, it engages in an IPO. Corporations choose to "go public" instead of issuing debt securities for several reasons. The most common reason is that capital raised through an IPO does not have to be repaid, whereas debt securities such as bonds must be repaid with interest. 

The aftermarket performance of an IPO is how the stock price behaves after the day of its offering on the secondary market (such as the NSE or the BSE). Investors can use this information to judge the likelihood that an IPO in a specific industry or from a specific lead underwriter will perform well in the days (or months) following its offering. The first-day gains of some IPOs have made investors all too aware of the money to be had in IPO investing. Unfortunately, for the small individual investor, realising those much-publicized gains is nearly impossible. The basic problem is that individual investors are just too small to get in on the IPO market before the jump.

Those large first-day returns are made over the offering price of the stock, at which only large, institutional investors can buy in. The system is one of reciprocal assistance, in which the underwriters offer the shares first to the clients who have brought them the most business recently. By the time the average investor gets an attractive IPO, it's on the secondary market, and the stock's price has already gone up.

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