Every budding investor who wants to be successful in investing and wishes to have an exponential Wealth accumulation has to understand and master a few fundamentals of Stock Market Investing. Any company begins its journey of being public through an IPO and eventually, if needed, issues an FPO. People have heard about IPOs quite a lot recently but often wonder what an FPO in the share market means and what are the differences between an IPO and FPO. Let us read about it; you would need to understand it as the upcoming IPO list for this year is long.
What is an FPO
FPO or Follow-on Public Offer, as the name suggests Follow on public offer, is a subsequent issuance of equity shares after the company is listed on any stock exchange. Simply put, FPO is an additional issuance. In contrast, Initial Public Offering or the IPO is the initial or the first issue.
Types of FPO
An FPO offering happens to raise extra capital to reduce the company’s current debt.
It has two ways of being offered.
1> Dilutive FPO: In the Dilutive Follow-on Public Offer, the company issues additional shares in the market for the public investors to buy without affecting the company’s valuation. Though this reduces the share price and also leads to a reduction in the earnings per share.
2> Non-Dilutive FPO: Non-Dilutive FPO happens when more significant shareholders of a company, such as the board of directors or founders/co-founders, sell their privately held shares in the market for the public investors. This method does not create new shares, but the number of shares available to the public increases. This way, the company’s earnings per share are not affected.
Should you Subscribe for an FPO?
FPO is considered advantageous compared to an IPO because the investor gets to understand the business model, practices, and the people handling the business, clearly indicating the potential growth it may have.
Since the company will not be a newly listed one, the investor will have the historical data for its earnings, stock performances, and enough references to bank on.
Shareholders buy the FPO shares at discounted prices and sell them at a premium to make a profit in the market.
Even though FPO still requires a certain degree of research, it is still less than the one needed for an IPO.
It allows the investors to buy the shares of a company at a discounted price.
Also Read: What is an IPO & Benefits to Invest in IPO in India?
FPO vs IPO
- Definition: IPO is an offer made to the public for a subscription for the first time. FPO Is an offer made available to the public by an already traded company
- Issuer: The issuer for the IPO is an unlisted company, whereas a listed publicly traded company offers FPO
- In an IPO, the capital is raised from the public for the first time; in FPO, it is done through a subsequent public contribution.
- Risk: IPO carries a high level of risk; FPO Is relatively less risky
- Objective: IPO Is mainly offered to raise capital through Public Investment. The main objective of FPO is a subsequent public investment.
- Predictability: IPOs tend to be less predictable as compared to FPOs
- Profit: IPOs tend to offer more significant returns as compared to FPOs
Investing in an FPO is better due to its reliability and more predictable approach, making them less risky than IPOs. FPOs are found to be more reliable as the investors have more information available to them. Simply put, choosing between IPO or an FPO entirely depends upon your risk tolerance levels and your financial goals. To be comfortable investing in an IPO, your risk tolerance levels should be really high, as there is less information available about the company to bank upon. To invest in an IPO as an investor, you would need to understand company fundamentals thoroughly. Suppose you have a long-term investment horizon and a good appetite along with good faith in the company. If this is the case, you can consider investing in an IPO. Since Risk and Returns are co-related, IPOs provide a higher potential for return. It is always advisable to understand your profile as an investor before taking any decision.