Difference between IPO and FPO Every Investor Needs to Know

Introduction

IPO / FPO are processes by which a company can collect money from the general public of the country in exchange for an equity or an ownership in the business.

When a company is in need of funds for their business, they can either to a bank and get a loan or float its IPO and collect money from the people of the country.

This section covers the differences between the two process the companies use to raise the financials for their business and the difference between their approach.

What is an IPO

An Initial Public Offering, which is commonly referred to as IPO is an issue floated by a company when it desires to collect money from the general public of a country as an investment to expand the business in a return giving equity to the investors. When such company comes with an offering for the very first time, it is called as an IPO.

The IPO / FPO are regarded as the primary market as the money collected by the company is directly involved in the day to day business activities of the company.

What is a FPO

There can be instances where the company needs further more money to run the business after issuing their IPO. In such a scenario, the company goes to issue an FPO (Further Public offering).

Four differences between an IPO and FPO

1. Pricing of the issue

The IPOs are usually priced independently of their valuations. If the company has a good brand value or a name in the market, these companies tend to sell their stake at a higher price. This is usually done to improve the cash flow and take the most out of the IPO issued.

On the other hand, FPOs are usually cheaper and are dependent on the current stock price of the company. When the FPOs are floated, the investors still have the opportunity to invest via secondary markets. Hence, in order to attract the investors for their FPO, the companies tend to float the issue at a discount than the current company stock price.

2. Valuations

IPOs are usually on a higher side when they are compared with the valuations they are floated at the time of bidding. This is because the companies who want to take money from their investors want to sell their equity at a slightly inflated price.

Since the issue price of FPOs are available at a cheaper price than the current company stock price, they are usually floated at much lower valuations which gives the opportunity to the investor to invest at fair value.

3. Risk profile

IPOs are considered one of the riskiest forms of investment. Investors bet their money on a company only expecting a positive return by studying the current market trend and company brand value. As you know, higher the risk, higher can be the returns.

FPOs are a little less risky then IPOs, but then do come with a sizable risk factor. Since the company is already public, most of the information about the company is out to the investors, hence mitigating the potential of down sight by calculating the risk.

4. Profit potential

The profits are made on an IPO when they are issued at a premium than the floated price. The value of the stock to be issued at a premium and at what premium depends on various factor like company profile, issue subscription etc. There is also an equal chance for the IPO to go bust!

FPOs on the other hand are floated at a value lower than the current company stock price, usually at a discount of 10 to 25 %. This creates a great opportunity for arbitrage, to buy from FPO market and sell in secondary market, giving a net profit of the price difference. The profit potential in case of FPO is much higher.

In a nutshell

Particular	IPO	FPO
Pricing of the issue	Independent	Dependent on the prices of the stock in the secondary market
Valuations	High	Low
Risk profile	Very high	High, but less risky than IPO
Profit potential	Moderate	Very high

Some Frequently Asked Questions

Also read on How Does An IPO Bidding Process Actually Work to know more about IPOs and their processes.