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Understanding IPO (Initial Public Offering) and Its Purpose

In various media, of course we often hear about the IPO or Initial Public Offering. What exactly is the meaning of an IPO in the stock market? What is the purpose? All will be answered in this article.

Understanding IPO (Initial Public Offering)

The IPO is referred to the Initial Public Offering. IPO is a stock of a company that is first released to be offered or sold to the public / public. Therefore, companies that conduct IPOs are often called "GO PUBLIC".

The purpose of the IPO

Why does a company want to sell or sell its shares to the public / community? There are various types of corporate goals for an IPO, including:

  • Get cheap funds. Companies can get funds from various sources such as issuing bonds, borrowing money from banks. But both of these methods have an obligation, namely paying interest. Meanwhile, if the company releases shares to get funds, the company is not burdened with interest.
  • The company's financial performance is better. By getting these cheap funds, the company can pay off debt and improve its financial statements quickly.
  • Potential for faster growth. Companies can use internal funds for expansion, for example to open branches. But if you have low-cost funds, expansion can be faster and in the long run the company's growth potential can be greater.
  • Improve company image. Public companies will always be highlighted by the media. If it can be managed well, the media spotlight can be an indirect marketing tool for the company.
  • Increase overall company value. With going public, the value of the company has the opportunity to increase greatly in the future in line with rising share prices. If the company is perceived to have a good performance by investors, the chances of a stock increase also increase.
  • Generally the shares released to the public are only a small part of the total number of company shares. For example X Company releases 10% of the total shares to the public. The number of shares released to the public is 1 million shares. Initial share price of USD 10,000 per share. Then the company's overall value is: (100/10) x stock price x number of shares = (100/10) x USD 10,000 x 1,000,000 = 100 billion

For example the stock price after the IPO increased to USD 20,000. Then the overall value of the company is: (100/10) x stock price x number of shares = (100/10) x USD 20,000 x 1,000,000 = 200 billion. So the increase in the company's stock price after the IPO, will also increase the overall value of the company.
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