Q:

How does an IPO allow an organization to grow financially?

A:

Quick Answer

An IPO, or an initial public offering, expands a firm's investor pool and thereby enhances its capital generating ability, resulting in financial growth and profit generation. When a firm issues an IPO, it is no longer a private entity.

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Full Answer

The IPO brings a company into the public domain, where institutional investors buy shares issued by the company, thereby helping in the generation of capital or in the repaying of debt. This sudden influx of capital can also be used to enhance the day-to-day working of the firm, increasing its productivity and supply. Increase in supply to meet a growing demand translates into magnified profits. Higher profits mean higher share value. Higher share prices result in higher capital generation, as more people buy the company's shares.

This prosperous cycle, if properly controlled, can cause the firm's financial position to escalate. Investors begin to view the firm more positively. The public domain gives the firm more exposure, enhancing its image and brand value. Shareholders who caught the wave early by buying shares at their initial minimal rate can also look to make a profit potentially by selling shares at the current inflated value following the firm's growth.

Shares also offer additional options for financial deals as firms offer stock options as part of take-overs and mergers. Acquisitions, in return, further the firm's cause by enabling a spurt in its growth and size.

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