How do flotation and Initial Public Offerings (IPOs) raise capital?

Flotation and Initial Public Offerings (IPOs) raise capital by selling company shares to the public for the first time.

Flotation, also known as 'going public', is a process where a private company transforms into a public company by issuing shares to the public for the first time. This process is typically facilitated through an Initial Public Offering (IPO). An IPO is a type of public offering where shares of a company are sold to institutional investors and usually also retail (individual) investors.

The primary purpose of flotation and IPOs is to raise capital. When a company decides to go public, it essentially sells a part of its equity in the form of shares to public investors. The money raised from this sale of shares is capital for the company. This capital can be used for various purposes such as funding research and development, paying off debt, or expanding into new markets or sectors.

The process of flotation begins with the company hiring investment banks to underwrite the IPO. These banks will conduct due diligence, prepare the registration documents for the securities regulator, market the share sale to investors, and handle the share allocation and pricing. The price at which the shares are sold is determined by the perceived value of the company, which is influenced by factors such as the company's financial performance, the economic environment, and investor sentiment.

Once the shares are sold, they can be freely traded on a stock exchange. This provides liquidity for the company's shareholders and allows the company to access a wider pool of capital in the future through additional share sales.

However, it's important to note that while flotation and IPOs can provide significant capital, they also come with costs and obligations. These include underwriting fees, legal and accounting costs, and the ongoing requirement to disclose financial and operational information to the public. Therefore, companies must carefully consider these factors before deciding to go public.

In summary, flotation and IPOs are key methods for companies to raise capital. They involve selling shares to the public, which provides the company with funds that can be used for various purposes. However, they also come with certain costs and obligations.