You probably think that IPO was the only way for companies to make money through their stocks. Well, it turns out that it is only one of the many ways. You must know that IPO is just the starting point. Even after it, companies can make money from stocks through things like FPOs (Follow on Public Offer), buybacks, rights issue, etc.
What happens after the IPO?
After the IPO, the company’s stock becomes available for trading and investing on the stock exchanges. The company can also distribute a portion of its profits as dividends to its shareholders. Interested investors can purchase shares of the respective companies directly through a Demat account. If you’re not already familiar with how the IPO price was set before shares started trading, Book Building Process of IPOs in India covers exactly that — understanding it helps you make sense of why post-IPO prices often diverge from the issue price on listing day.
How Companies Make Money from Stocks?
After the IPO also a company can make money from its stocks. The most commonly practiced ones are listed below.
By Issuing FPO (Follow on Public Offer)
Companies wanting to raise more money from investors after their IPO often go for FPO (Follow on Public Offer). With an FPO, the company issues new shares to investors. It is done secondary to the IPO.
Share Buybacks
Companies buy back their shares at either market price or a higher price. This, in turn, can shoot up the stock price, which increases the net value of a company. However, it does not earn them money directly but rather improves their net value. When a company buys back its own shares, it’s essentially saying its stock is undervalued relative to what the business is actually earning. Return on Equity (ROE) → is one of the best metrics to judge whether that claim holds up — it shows how efficiently the company generates profit from its equity base.
Block Deals
The company sells its shares in bulk quantity to interested HNIs (High Net Worth Individuals) and Institutional Investors at a price decided mutually by the two parties.
Rights Issue
A rights issue is a way for a listed company to raise additional capital by offering new shares to its existing shareholders, usually at a discounted price than the one available in the market and in proportion to their current holdings.
Using Stock as Currency
Public companies often use their stock as currency to acquire other businesses within or outside their operating sector. Instead of regular currency, companies make payments in the form of their stocks, which can be liquidated by the other part as and when needed. It is a preferred method because significant gains can be made if the share price appreciates in the coming years.
Raise Capital
Companies use their stocks as collateral to raise capital in the form of debt or by issuing bonds. The money raised is then used for the company’s growth and expansion.
However, one must also understand that the company does not make any money from the daily price movements of the stock. Promoters make their money by liquidating their shares in the market.
How Companies Use Money Made from Stocks after the IPO?
Companies use the money generated from stocks after the IPO in several ways:
Repay Debt: The company uses the money from the IPO and afterwards to pay off the debt and other financial obligations.
Research and Development: Investing money into research and development is crucial for not lagging in terms of technology.
Launching New Products: Money is used for launching and testing new products in the market to add new revenue methods.
Working Capital Requirements: These include paying salaries, managing inventory, and handling supplier payments.
Mergers & Acquisitions: Money is used to make strategic acquisitions of smaller players.
It is important for you as an investor to monitor the company’s activity concerning it stock as it can indicate any existing red flags regarding the top management and promoters.
However there are various methods through which companies raises capital while starting the journey.
Final Thoughts
An IPO is a great way for businesses to raise capital and allow people to invest as per their capacity. Even post the IPO, companies can continue using stocks to make money. The money thus generated is used for the growth of the company.
For investors, knowing the activity of a company concerning its stock can help them make better investing decisions. It might also indicate the future potential of the underlying business management. As an investor, knowing when to sell shares you received through an IPO allotment is just as important as understanding how companies raise money post-listing. How to Sell IPO Shares covers listing day strategy, tax implications, and when holding makes more sense than selling. Ready to invest in companies post-IPO? Open a Free Upstox Demat Account →
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