The first sale of the stock to raise money from the share market which helps a company to get listed on the stock exchange is called Initial Public Offerings (IPO). Through public offering the shares are offered to general public or the retail investors.
Basic Characteristics of IPO
Share price is fixed based on the valuation of the company which is done by the merchant investment banks.
Company prefers IPO to raise money during the bull market as it makes the valuation more attractive because of more demand and increased investor confidence.
The valuation can be manipulated to make it higher to raise more money unlike the debt route of raising money.
India, companies has to file the DRHP (Draft Red Hearing Prospectus) to the market regulator SEBI to be eligible for the IPO. In US, SEC (Securities and Exchange Commission) regulates all the IPOs.
More regulation gives confidence to the retail investors.
Companies have to maintain a fixed quota for every type of investors like Retail, HNI (High Net worth Individuals), QIB (Qualified Institutional Buyers) to raise money from the market so that everyone get a chance to subscribe for the IPO.
The IPO process is driven by the book-building process where everyone can see the status of subscription or the demand of the particular during the time the IPO is open for subscription.