What is the Difference Between IPO and Share?

The terms IPO (Initial Public Offering) and shares are fundamental concepts in the world of finance and understanding the difference between the two is crucial. An IPO is the process by which a private company goes public by offering its shares for the first time to the general public. It’s a way for the company to raise capital. Shares, on the other hand, represent ownership units in a company, and they can be bought and sold on the stock market after the IPO. Understanding the difference helps investors make informed decisions about participation in public offerings or buying shares on the open market. 

In this blog, we will explain IPO and shares, their types, and the differences between them.

What is an IPO?

An IPO, or Initial Public Offering, is a process through which a private company offers its shares to the public for the first time. This transition from a private to a public entity allows the company to raise capital, expand, and gain market visibility. Investors need a Demat Account to hold shares electronically, and a trading account is required to trade these shares easily. After the IPO, shares are listed on the stock exchange allowing buying and selling of shares at market driven prices. The difference between IPO and stock is that IPO is an event, while stocks are the actual assets offered in the IPO. Understanding IPO vs. stock is key for anyone interested in the financial market. 

Read Also: IPO Application Eligibility Criteria:

Types of IPO

The two main types of IPOs are mentioned below:

• Fixed Price Issues: In a Fixed Price Issue, the company sets a specific price for its shares and allows the investors to know the exact purchase price before going public. The company hires underwriters who determine the share price at which the securities will be allotted if the IPO application is successful. However, the price is set without considering the investor’s demand for shares, which can affect investment returns.
• Book Building Issues: In contrast, a Book Building Issue involves a price range within which the investors can place bids, and the final price is set based on the demand for shares within that range. This method captures the market demand for shares and results in better price discovery.

What is a Share?

A share, commonly known as common stock or an ordinary share, represents a unit of ownership in a company. It entitles shareholders to a portion of its profits and voting rights. Shareholders have the right to vote on key issues such as election of board members or the approval of major company policies. They may also receive dividends, although these are not guaranteed and depend on the company’s profitability.

However, in the event of liquidation, common shareholders are paid after bondholders and preferred shareholders. Common shares are what investors trade in the stock market, making them a popular choice for individual investors looking to participate in a company’s growth. However, ordinary shares often carry more risk and may offer higher potential for returns if the company’s profitability increases.

Types of Shares

The two types of shares are mentioned below:

1. Common Shares: A common share represents an ownership unit in a company and gives shareholders voting rights and dividends. However, in the event of liquidation, common shareholders are last to receive payouts after creditors and preferred shareholders. 
2. Preferred Shares: On the other hand, preferred shares have priority over common shares when dividends and assets are distributed during liquidation. However, these shares generally lack voting rights.

Difference Between IPO and Share

The main difference between an IPO (Initial Public Offering) and a share lies in their definitions and roles in the financial market. An IPO is the process through which a private company offers its shares to the public for the first time, enabling it to raise capital. It’s simply a debut event for a company’s stock on the stock market.

On the other hand, a share represents a unit of ownership in a company. After the IPO, shares are available for trading on stock exchanges, and they are what investors buy and sell in the secondary market. In short, an IPO is the event, while shares are the tradable assets. To invest in an IPO, individuals need a Demat Account to hold shares electronically and can use a trading account to easily buy and sell shares. 

Read Also: What is an IPO Subscription & How Does it Work?

Conclusion

In summary, an IPO is an event in which a company offers its shares to the public for the first time, marking its transition from private to public ownership. This process allows the company to raise capital and expand its operations, while shares represent the actual units of ownership in a company that investors buy and sell on the stock exchange. Investors need a Demat Account to hold these shares electronically and can use depository participant’s (DP) platforms to access their trading accounts for trading shares. 

FAQs