Understand the Role of IPO in Stock Market

Post the Covid-19 pandemic, IPO investment market has taken stock market investors by storm. Retail participation in the stock markets increased overall in the most recent fiscal year, FY22 (financial year 2021-2022), with 89.7 million demat accounts opened. That was a jump of 63% over the previous fiscal year. So, naturally many investors flocked to the stock markets. However, the IPO was one of the main destinations for new as well as old stock market investors. The year 2021 saw numerous new IPO listings on the stock exchanges. The IPO trend still continues in 2022, although it has seen a slowdown due to  various macroeconomic issues. 

Many IPOs delivered fruitful listing gains and short-term gains, and they rose up in popularity. However, in this article, let us look beyond those short-term gains, and comprehend the significance of the role of an IPO in the stock market. 

What is an IPO? 

If you are a newbie in the stock market, there is a high probability that you have heard the term IPO several times. However, if you wish to invest in one, you ought to know more. In simple words, an initial public offering, abbreviated as IPO,  is the means through which a private company lists itself on the stock exchange. So, an IPO is the first opportunity retail inventors get to invest in a company. When a company launches its IPO in India, it gets listed on the NSE and BSE, or at least on one exchange. In countries like the United States, IPOs list on the US stock exchanges like the New York Stock Exchange (NYSE) and the NASDAQ. 

So companies like Reliance Industries, Asian Paints, and ICICI Bank all listed on the exchanges by coming out with their IPOs. But why would a company want to list itself on the stock exchange and sell its shares to the public? 

Role of an IPO 

1. Raising Capital 

The main reason a company comes out with an IPO and lists itself on the stock exchange is so that it can raise capital. Through an IPO launch, the company raises capital, in the form of funds by letting the public make an IPO investment . A company may require funds for various reasons with growth being the primary one.A company begins small and may initially rely on debt and PE (private equity) funds to fund expansion projects. However, once it reaches a mature growth phase, an IPO makes plenty of sense to raise funds and continue its growth trajectory. The money it raises through the IPO is used to scale up the existing business, make new acquisitions, and meet operating expenses. 

2. Other Corporate Purposes 

Besides capital expansion, the business could also use the money to pay off existing debt and offer exit routes to existing investors like PE funds and venture capitalists. These PE funds and venture capitalists, look out for new startups that could pose as interesting investing opportunities. At the same time, when the company is listed on the stock exchanges, that enhances its public image, because a publicly traded company needs to meet a bar of transparency. The company is to announce how it plans on using the funds before launching its IPO. 

3. Providing New Investment Opportunities 

 The IPO plays a great role in terms of helping a company raise money. But what is it for the investors in the stock market making the IPO investment? The answer is simple—an IPO gives retail investors new opportunities to grow their wealth and compound it over time. Just  imagine how much money investors might have made had they invested in and held on to IPOs of companies like Reliance Industries, Infosys, or Tesla. You could take a look at the maximum price chart of these companies if you do not have perspective. Now imagine  what would have happened if all these companies never went public. Investors would never be able to take advantage of the wealth these companies generated. 

However, remember that not every IPO investment  will list and become a multibagger like Reliance or Infosys. In fact, several companies also take advantage of the masses and launch their IPOs at extravagant valuations. So, invest in an IPO only after you analyse the company diligently. 

4. Growth of Economy 

The country’s stock market expands as more companies list on the open market And as the company continues to flourish, it helps grow the wealth of retail investors. At the same time, the company may catch the eye of foreign investors and bring in foreign capital to the country. The foreign inflow will help the company scale further and contribute to the GDP of the country. So, if you look at it from a macroeconomic perspective, an IPO helps with GDP growth. 

Conclusion

So, an IPO investment may play an important role in helping the company grow, the  investor’s wealth grow, and even the country’s GDP grow. However, as a retail investor, always stay diligent and invest in only those IPOs where you see potential and value. You can subscribe to any IPO, once the subscription window opens, using your trading account.