Understanding the Basics of FPO
The financial landscape is a complex web of investment vehicles, each endowed with its unique characteristics, potential risk factors, and advantages. Securing a firm grasp over the concepts can often prove to be a herculean task. This article aims to find the answer to the important question: What is FPO? and throw light on the varying types along with benefits in the Indian financial market.
What is FPO? A Detailed Overview
FPO stands for Follow-on Public Offer. It is a many times utilized tool by listed companies to raise additional capital from the public. “Follow-on” was termed because companies that are already listed in the stock market issue FPOs. The additional shares can be offered to existing shareholders or to the general public. Regardless, FPOs have turned out to be a great instrument in leveraging the financial strength of a company.
Types of Follow-on Public Offers (FPO)
Broadly, there are two types of FPO: Dilutive and Non-Dilutive. Dilutive FPO As the name suggests, a Dilutive FPO varies from a non-dilutive FPO in that it dilutes the company’s stock. In simpler terms, new shares are created, which may increase the total number of shares; therefore, it will have an effect on EPS.
In contrast, a Non-Dilutive FPO refers to the issue of shares that were privately held or already created but never brought out into the market. While each of these has an objective of channeling excess capital into company projects, the investor has to take into consideration the unique aspects of the two before making an investment decision.
Delving into ‘Futures and Options’
But before delving deep into what an FPO is, let’s explain the foremost investment tools termed as ‘Futures and Options‘. In the simplest sense, Futures and Options, or in short, Derivatives—put very simply—are financial contracts that derive their value from any underlying asset. They grant traders the right to buy or sell assets at a pre-agreed price in the future. What is particularly important to note here, though both are the most advanced investment tools, is that FPO and futures and options are distinct facets that offer the investor pool different types of opportunities and risks.
Advantages of FPO
Potential for Capital Appreciation Through FPOs
FPOs have high potential for capital appreciation and, therefore, interest to investors. First, companies listed in the stock exchanges come with a track record and, therefore, are less risky compared to IPOs (Initial Public Offering), where a company is coming to the market for the first time.
A successful FPO is, therefore, an indication that the company is growing positively. Additional capital raised is a show that the firm can easily expand and further innovate its operations. Investors can hence benefit from the company’s growth.
Predictability and Pricing Stability in FPO Investments
Moreover, in most cases, pricing is less volatile for FPO compared to IPO because of better predictability caused by the pre-existing market performance data. This very predictability helps investors make informed decisions regarding the investment matters.
Last but not the least, FPOs offer a platform to long-term investors to purchase the shares of a company at an offer price that is generally lower than the current market rate, making them the prospect of better return in the future.
However, every investment carries some form of basic risks, and FPOs are no exception. Investors must perform due diligence, proper market research, along with the scrutiny of the financials of the issuing company before any investments are made in the instrument.
Conclusion
FPOs provide a great avenue for investors who are after better returns as well as companies who need to raise some extra capital. This notwithstanding the fact that it falls under the greater Indian stock market, which includes future options, among others, the special role of an FPO cannot be overlooked.
Disclaimer
Investing in the stock market requires prudent decision-making and thorough research. While FPOs may present attractive opportunities, the investor must gauge all the advantages, risks involved, and individual financial circumstances before venturing into trading in the Indian stock market. Always consult a financial advisor if you’re unsure about the investment decisions.