Growing companies need capitals or investments in order to expand their business. In order to do that company sell partial ownership or stock to the public in order to raise more money for investment. Initial public offering is when a company sells its stock to the public for the first time to raise capital. In an initial public offering, the company brings in an underwriting fir or investment bank to help select the best type of security to issue, offering price, amount of shares and timeframe for the market offering.
There are two types of IPO:Fixed Price MethodBook Building MethodUnder fixed price, the company determines a fixed price at which its shares are offered to the public. The investors get to know the share price before the company goes public. To invest in this IPO, the investors must pay the full share price when making the application.Under book building, the company offers a 20% price band on shares to public when going public. Investors then bid on the shares and when the bidding is closed the final price is settled.
Investors have to specify the number of shares and the price they are willing to pay. The final share price is settled using the bids of the investors.Other than an initial public offering, another way to go public is direct listing or direct public offering. Small companies or startups may not have the resources to pay the high costs to underwriters. These companies go through direct listing.In DLP, the company sells its shares without any intermediaries directly to the public.
There are no new shares issued, no underwriters involved, and no lock-up period.