Firms raise funds for a variety of reasons, such as growth, expansion and research, and development. Some firms also raise funds to pay the debts back to the creditors and to fend off competition. Seeking lenders and investors to invest in the company is far more favorable than using the profits from ongoing operations. Companies may require funds to carry on with the operations too.
Public companies raise money by sharing their shares in an Initial Public Offering (IPO). The IPO lists the company's shares in the stock market and it is traded in the exchange. Companies may also raise debt by using nonconvertible debentures or bonds.
Note − The best way for earning revenues from the market is via an IPO.
In the case of equity, raising funds could be done through IPO or an FPO (Further Public offer). For FPO, the company must be already registered in the stock exchanges. Another form of raising capital is via Rights Issue to already existing investors. In another way, firms may choose one large investor and/or a group of institutional investors to raise funds. This is known as private placement.
Note −An FPO is done by an already registered company. It is an additional offer by big public companies.
IPOs are riskier investments than the FPOs as there is no previous track record available in the investor's possession. In an IPO, the company lists its shares for the first time. Hence, it is unknown whether the business will make a profit or not. This keeps the shareholders or investors in a risky zone in regard to their investment.
An FPO is done by an already registered public company. So, the investors may look at past track records and determine whether it would make sense in making an investment in the company.
IPOs are often used for the purpose of expansion while FPOs are used as a vehicle to divest ownership by the companies.
Note −IPOs are used for expansion, while FPOs are done for divestment.