An IPO stands for Initial Public Offering – the first time a company offers shares to the various sections of the investor population in our country. In the primary market when a share is issued/ offered to public, the money that we pay towards the share goes directly to the promoters of the company.
An IPO is a process where the promoters of a company issue shares to the public to raise money to expand and run their business more effectively. Once an IPO is complete, the shares are delivered to the public and the promoters can use the money for their business. Once every year the company would declare its results and maybe a Dividend to keep its share holders happy. When an IPO is offered it can be either at face value or at a premium.
Issue at Face Value:
This is an issue where the promoters of the company issue shares to the public at the face or base value of the share. The face value of shares is usually Rs. 10 or Rs. 5 or Rs. 1 or any other denomination that the promoters deem appropriate. Such issues are very rare.
Assuming the company issues 100,000,000 shares @ Rs. 5 per share face value the company would make Rs. 500,000,000/-
Issue at a Premium:
This is an issue where the promoters of the company issue shares to the public at a price which is much higher than its face value. The value that an investor pays for a share over and above its face value is termed as the “Premium”
Assuming the company issues 100,000,000 shares of Rs. 5 face value @ Rs. 50 per share, the company would make Rs. 5,000,000,000/-
Here an investor is willing to pay Rs. 45/- extra per share over and above the original price of Rs. 5/- per share because of the history of profit making and strong business presence over the previous years. Since the investor feels that this company can continue to exhibit such strong business performance he is willing to offer this Premium.
Now that we know the basics of what an...