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IPO Meaning
An initial public offering, or IPO, is the first time a company will sell its shares to the public.
That means they are selling some shares of stock representing partial ownership of their business to the public.
When these shares are sold, the company ceases to be a private enterprise and is now owned partially by the public.
A private company is owned by only a few shareholders.
But, it is usually impossible or difficult to buy shares in a private company.
In this case you can approach owners of the business and express intent to invest in their company. But they are not obliged to sell you anything.
Public companies offer or sell a part of their company, to the public and trade on a stock exchange.
That’s why listing an IPO is referred to as “going public.”
Why Do Companies Go Through Initial Public Offering’s?
Companies undergo an IPO to raise capital.
Instead of going to the bank to raise that cash through a loan, they would sell a part of their business to the public, to willing investors, in exchange for their cash.
Generally, this cash will be used for business expansion or promotion.
But it can also be used to allow owners, employees, or early investors to sell their shares and make money.
Going public also allows the company to raise capital in the future by offering more of its shares in the market.
This is known as a follow-on offering.
Why Do Investors Participate in IPOs, What is initial public offering advantages?
From an investor’s standpoint, an IPO gives the investor the opportunity to invest in a once private business and take part in its possible future growth.
Technically, the investor now own part of that business.
So as the business grows and makes money, the investor now can take part in that growth and money–making.
Ultimately, the investor participates in an IPO for the opportunity to gain a return from the appreciation of the value of the company’s shares or through cash dividends that the company may give out later on.
How Do You Know If It Is a Good Initial Public Offering?
An investor’s main source to analyze the company undergoing an IPO is through a prospectus.
This is an official document containing all the information about the company, including the management team and how they plan to use the funds generated from the IPO.
Here you should be able to gauge if the company has potential long term growth.
If you’re interested on an IPO, talk to your broker as well to know more about the company.
But, brokers are prohibited by regulation to give specific advice on an IPO until after its listing date.
You can also find a copy of the prospectus from the Philippine Stock Exchange Website or directly from the IPO company’s website.
TRC have not recommended an IPO to us because of the possible risk that comes when a stock does not have historical performance and track record in the market.
How Can I Subscribe and What Are The Initial Public Offering Requirements?
Whenever there is an IPO, brokers are given a limited number of shares for their clients.
It depends now on the broker how the shares will be allocated to their clients. Brokers have their own way of allocating such shares to their clients.
For COL (my broker), they initially allow the client to subscribe their desired number of shares.
But, once the subscription exceeds COL’s allocation of shares, an over-subscription process will be implemented.
Here, COL will raffle off shares which may be by their minimum board lots to those who subscribed to the IPO.
Another way to get shares of an IPO is through the Local Small Investors Program (LSIP).
The LSIP is a special offer mandated by the PSE to the IPO company, providing for the limited offering of shares to the public.
It normally allows for allocations of up to P25,000 per individual investor – but also limited by how many shares are available all in all.
For example, in the Italpilipinas Development Corporation (IDC) IPO, there were 5,763,000 common shares available with a maximum of only 6,000 shares that each person can apply for.
Applicants of the LSIP can get their application forms through a Receiving Agent, Underwriter, or any PSE Broker.
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