Many fast-growing companies require substantial capital to support expansion, product development, and the strengthening of their financial structure. When funding needs can no longer be met solely through internal cash flow or bank loans, companies may choose to conduct an IPO as a strategic step to raise funds from the public.

So, what is an IPO? What are the objectives and risks that companies need to consider before undertaking one? Let’s explore the answers in this article.

What Is an IPO?

An Initial Public Offering (IPO) is the process by which a company sells its shares to the public for the first time and becomes officially listed on a stock exchange. At this stage, the company’s shares can be purchased by both retail and institutional investors.

After completing an IPO, a company changes its status from a private company to a public company. This means the company must adhere to higher standards of transparency, enabling investors to objectively assess its financial health and performance.

Objectives of an IPO

An IPO offers various strategic benefits that can support long-term growth. The main objectives include:

1. Raising Capital for Expansion

An IPO enables companies to raise substantial funds from the public. These funds are typically used to accelerate business expansion, open new branches, develop products, or increase operational capacity.

2. Enhancing Corporate Credibility and Visibility

Once listed on the stock exchange, a company’s reputation generally improves as it must comply with stricter transparency and corporate governance standards. This enhances trust among consumers, business partners, and investors.

3. Expanding the Investor Base and Creating Liquidity

Company shares become accessible to a broader range of investors, including large institutional investors. In addition, existing shareholders gain liquidity, as shares can be traded more easily in the capital market.

A Brief Overview of the IPO Process

Companies must go through several key stages to ensure business readiness and information transparency for potential investors. The process typically includes:

• Initial Preparation: The company prepares its financial statements, business structure, and regulatory requirements before entering the IPO process.
• Prospectus Preparation: This document outlines the company’s condition, risks, planned use of funds, and details of the shares being offered.
• Initial Offering (Bookbuilding): The company and underwriters gauge investor interest to determine an appropriate price range.
• Share Price Determination: The final offering price is set after market demand becomes clearer.
• Stock Exchange Listing: The shares are officially listed and begin trading on the exchange, marking the company’s full transition into a public company.

Benefits of an IPO 

Through an IPO, investors have the opportunity to purchase shares at the initial offering price, which is often relatively more competitive. Since the price is set before public trading begins, investors may obtain shares at a more attractive valuation compared to prices after listing.

In addition, investors may benefit from potential capital gains once the shares start trading on the exchange. If market demand is strong and the company’s prospects are considered promising, the share price may rise significantly, creating profit opportunities.

Risks of an IPO

Despite its appeal, an IPO also involves risks. One of the main risks is the possibility that the share price may decline after it begins trading on the exchange. This can occur if market interest falls short of expectations or if overall market conditions are unfavorable.

Furthermore, trading in the early days after listing is typically more volatile. Share prices may fluctuate rapidly due to active buying and selling within a short period. Therefore, investors should carefully consider their analysis and risk profile before participating in an IPO.

Significant Opportunities for Business Growth through an IPO

An IPO is an important step for companies to gain access to substantial funding while accelerating business growth. Beyond that, it also provides opportunities for the public to participate in a company’s growth by purchasing its initial shares.

Want to learn more about IPOs? Contact Mandiri Sekuritas, an experienced underwriter with over 25 years of expertise.