What is an IPO?

In today’s time, everyone wants to invest in IPO or Stock Market to gain maximum profits on their investments. But many people don’t have any idea about what IPOs actually are. If you are reading this blog, then it means you are interested in learning about IPOs.
So in this blog, I’ll tell you all about IPOs, how an IPO works, types of IPOs, how to invest in IPOs, and much more. So let’s dive into all the details of IPOs.

Table of Contents

IPO stands for Initial Public Offering, which refers to the issue of shares to the public by any company. In other words, an IPO (Initial Public Offering) is the first time a company is listed on the stock exchange. For example, in India, there are two main stock exchanges one is BSE (Bombay Stock Exchange) and the Second Is NSE (National Stock Exchange).

How Does an IPO Work?

For the working of any company, money is essential so, in the initial days of a company, mostly they started with either bootstrapping or taking money from FFR (Friends, Family, or Relatives), also known as Angel Investors.
Then comes the Seed Round. And after this round, the company goes for various rounds of funding Pre-Series and Series. In most cases, Pre-Series and Series rounds are from A to C.
After all these rounds, the company goes for its IPO to give the opportunity for anyone to invest in the company.
After the IPO, a private-held company is converted into a public company.
Once the IPO is done, the company’s shares are listed on the stock exchange and can be traded freely in the open market by anyone.
A company chooses an IPO because, after every round of funding, the shares of the company dilute among the shareholders.
And it’s possible for any investor to have a major stake (Stock) in the company. So that the company’s major decisions are in the hands of that investor. Which is not a good thing for the company.
It’s always beneficial for any company to have a small stake in the company by many investors than the majority stakes in the hands of only one investor. That’s the primary goal for any company to go for IPO.
After the IPO, a private-held company is converted into a public company.
Once the IPO is done, the company’s shares are listed on the stock exchange and can be traded freely in the open market.

Types of IPOs

Basically, there are two types of IPO

Fixed Price Offering: The Fixed Price IPO is the fixed issue price offered on the share price by the company to the investors.
Book Building Offering: In the case of Book Building Offering, the company offers a 20% price band on the stocks to the investors.

Why Does a Company Offer an IPO?

IPOs provide companies with an opportunity to obtain capital from anyone in the primary market. It is a good way for any company to raise more money than through private investors.
After the IPO, the demand-supply of the company’s shares, the company’s growth, and other factors can lead the share price up, which is a good thing for investors as well as for companies.
An IPO is also a good way to get publicity and fame for the company, which is a good thing for any company or brand.

What is the IPO Timeline

From the moment you apply for an IPO till you get the allotment in your name, with various procedures in between, it is known as IPO Timeline. This process is also known as the IPO Calendar, which includes the following :

Open/Close Date: This is the opening and closing date for bidding on an IPO.

Allotment Date: This is the date on which the IPO’s registrar publically announces the date of allotment status.
Refund Date: The amount is frozen till you get the allotment of the IPO shares. And in case you don’t get the allotment, then the amount gets refunded to you and that date of refund is known as the refund date
Credit to Demat Account Date: This is the date you get applied IPO shares in your Demat Account before the listing date of the shares of the company.
Listing Date: The listing Date is the date when the shares of a company are officially listed on the stock exchange and available for trading.

Basic IPO Terms

Issue size: The number of shares issued multiplied by the price of each share equals the issue size.
Lot size: The minimum number of shares that an investor must apply for in an IPO is known as the lot size.
Bidding: Bidding is to specify the number of shares and the price that an investor is willing to pay.
Price Band: The price band is a range of amounts between the upper and lower limit for a share in an IPO.
Allotment: When the investors receive their IPO shares in the Demat account.
Issuer: The company that wants to issue shares on the stock exchange (secondary market).
Underwriter: An Underwriter assists the company to underwrite its stock. In case the stocks offered at the IPO are not picked by the investors, then they will subscribe to the balance shares. An Underwriter can be a financial institution, a banker, a merchant broker, or a broker.
Under Subscription: Under Subscription is the condition when the shares applied by the public are less than the shares issued by the company.
Over Subscription: Over Subscription is the condition when the company receives more applications than the number of shares offered by the public.

What is DRHP (Draft Red Herring Prospectus)

The DRHP is the document that lets the public know all about a company’s IPO listings. It contains the following information :

The purpose of raising funds
Promotor’s expenses
Balance sheet
Commission and discounts of the underwriter
Net proceeds of the company
Earning statements of the last three years, if applicable
Copy of the underwriting document
Legal opinion on the listings

How to apply for IPOs?

Have a Demat Account with a broker that offers access to IPO investment: You should have a Demat Account with a broker that offers access to IPO investments. To open a Demat account you should have a PAN card, Aadhar card, Bank account, photograph, and signature. I am personally using a Upstox Demat Account you can try it also.
Read all the details related to the IPO: Go through all the details related to that IPO before applying. Details like important dates, DRHP, etc.
Apply before the date mentioned in the IPO: Apply for the IPO before the dates mentioned.
Place your order: Place your order by selecting the lot size and paying your investment amount. The investment gets blocked and if you don’t get any allotment, then your amount is sent back to you.

Things you should remember before investing in an IPO

Most of the time Investing in an IPO is a beneficial option, but before investing, you should keep the following things in mind:

Study the background of the company, financials, future aspects, and purpose of raising funds.
Go through all the things we mentioned in this blog.
See and note the IPO locking period. The “locking period” is the duration in which you can’t sell or trade the stocks after an initial investment.
Always plan an investment strategy before investing in any IPO.

Conclusion

More people are now attracted to investing in IPOs. But not all IPOs are good for investing. And you should not invest in IPOs just because everybody is investing in them. Just go through all the points I mentioned and do your thorough research before investing in any IPO. Hopefully, this blog is helpful to you doing your IPO investment.