FPO: What is It and Their Types?
FPO: What is It and Their Types?
FPO abbreviated as Follow-on Public Offer is a process in which an existing company listed on the stock exchange issue new shares to the existing shareholders or to the new investors.
It is different from an IPO where the company issue its shares to its public for the first time to collect funds in order to grow their business.
The reason behind the company performing an FPO is to expand its equity base. The company uses FPO only after the company has started the process of an IPO to make their shares available to the public and to raise capital for their business.
The FPO is raise basically for two major purposes:
1) To reduce the debt which is existing in a company
2) To raise additional capital for a company
IPO stands for Initial Public Offering, a process in which a private company goes public by issuing shares to the general public for the first time.
This is a relatively high investment since the investor does not have the opportunity to track the previous stats or records of the particular company to analyze before investing.
On the other hand, FPO is used by an already listed company in the stock exchange. This helps the investors to see the market trends and track their investments before making a decision.
IPO’s are generally used by private entities to expand their funds, and FPO’s are used by government entities to cover their debts or reduce their stake in the company.
There are two different types which a company can conduct Follow on Public Offer (FPO):
1) Dilutive FPO
2) Non-Dilutive FPO
Dilutive FPO
In dilutive FPO, the company issue additional number of shares but the price value of the company’s share does not changes and remains the same. This overall decreases reduction in earnings per share as well as the share price.
Here, the company’s board releases new share offerings to the public. However, an FPO is used by a company only to reduce the debt or to raise additional capital of the company.
Non-Dilutive FPO
Non-Dilutive FPO means the shareholders of the company sell their private shares to the public. Here the money directly goes to the individual offering and not to the company.
Thus, the per-share earnings of the company does not get affected.
Why Does A Company Need an FPO?
A company needs a Follow on Public Offer to raise additional capital for several major reasons, and it is fulfilled by conducting a dilutive FPO where new shares are offered. A large amount of money is generated.
The share price issued in an FPO is lower than the prevailing market price. The primary motive behind issuing shares at a lower price is attracting and getting more subscribers to its issue.
However, lower demand of the share price instantly lowers the market price and levels it with the FPO issue price.
FPO is generally considered an advantage compared to IPOS because investors get an idea about the company's management, business practices, and potential growth.
The company listed on the stock exchange is not new, and investors will get the historical reference for its earnings report, the performance of the stock market, and much data to bank on.
FPO tend to have less risk than IPO because the price fixed for an IPO is lower than the market price to attract shareholders to invest more in FPO.
Several shareholders engage in the FPO to buy shares at a discounted market price and sell them in the market to gain a premium on their transaction.
A lot of research is required in FPO to know about the company and its past performance, but the degree of homework in FPO is a lot easier.
Hence it goes well for risky investors and gives them an opportunity to access shares of a company at a discounted price.
- What does IPO stands for?
- What is FPO?
- How many types of IPO are there?
- What does Non-Dilutive FPO mean?
- IPOs and FPOs are used by which entities?
IPO stands for Initial Public Offering, a process in which a private company goes public by issuing shares to the general public for the first time.
FPO abbreviated as Follow on Public Offer is a process in which an existing company listed on the stock exchange issue new shares to the existing shareholders or to the new investors.
There are two different types which a company can conduct Follow on Public Offer (FPO):
1) Dilutive FPO
2) Non-Dilutive FPO
Non-Dilutive FPO means the shareholders of the company sell their private shares to the public. Here the money directly goes to the individual offering and not to the company.
Thus, the per-share earnings of the company does not get affected.
IPO’s are generally used by private entities to expand their funds, and FPO’s are used by government entities to cover their debts or reduce their stake in the company.
Final Thoughts
Investing in FPOs is considered to be a reliable option than IPO’s because it carries less risk. However, they are more reliable because the company is already listed on the stock exchange, and there is additional information available about the company to the investors.