What Is An IPO: Everything You Need To Know

Last Updated on January 2, 2024 by BFSLTeam BFSLTeam

An Initial Public Offering (IPO) is a significant financial event in which a privately owned firm goes public for the first time by selling shares of its stock to the general public. The firm collaborates with investment banks to decide the first stock price and total number of shares to be issued during this procedure. These shares are then made accessible to institutional and ordinary investors via stock exchanges.

They raise funds for the firm, which can then be utilised for expansion, debt reduction, or other corporate purposes. They also allow early investors and firm founders to profit from their investments. Furthermore, IPOs raise a company’s exposure and reputation, making it simpler to attract top people and purchase other businesses.

Investors in initial public offerings (IPOs) aim to profit from the possible increase in the stock price of the firm after it begins trading on the open market. However, investment in initial public offerings (IPOs) entails inherent risks, such as price volatility and uncertainty about the company’s future success. Due research and a thorough grasp of the company’s prospects are thus crucial for individuals considering an IPO.

Additional Read: Upcoming IPO in January 2024

The Advantages of Investing in IPO

Investing in an Initial Public Offering (IPO) may provide various advantages, including:

• Potential for Higher Returns: IPOs can allow investors to purchase shares in a firm at an early stage, perhaps at a lower price than the stock would trade for after the IPO. Investors can realise big cash gains if the firm sees strong growth and its stock price rises. The performance of the firm issuing the IPO is used to measure the performance of the IPO. 

• Access to Exciting Opportunities: IPOs often involve innovative and high-growth companies in emerging industries. Investing in these companies allows you to be part of their growth journey from the beginning. Investors can enjoy higher growth because of the initial risk they took by investing in the IPO. 

• Liquidity: IPOs provide an avenue to convert your investment into cash by trading the shares on public stock exchanges. This liquidity can be important for investors looking to buy and sell shares easily.

All in all, IPOs generally have more upsides than downsides, granted that the investors have done thorough research based on fundamentals and market history. 

Additional Read: How to apply for an IPO?

How To Invest In IPO?

• Research and Due Diligence: Start by researching the company going public. Understand its business, financials, and growth potential. The company will release a red herring prospectus with this information.
• Demat and Trading Account: Ensure you have a Demat (Dematerialized) and Trading account with a registered Indian stockbroker. You cannot apply for an IPO without these accounts.
• Funding: Make sure your trading account is funded with the amount you plan to invest in the IPO.
• Bank Account Details: Your bank account details will be linked to your Demat and trading accounts for the purpose of the Application Supported by Blocked Amount (ASBA) process. This includes the bank’s name, branch, and account number.
• Permanent Account Number (PAN): Your PAN card is required for KYC (Know Your Customer) compliance when investing in IPOs. It helps in tracking your financial transactions and tax liabilities.
• Apply for IPO: When an IPO is open for subscription, you can apply through your broker using the ASBA (Application Supported by Blocked Amount) process. This means the application amount will be blocked in your bank account but not immediately deducted. You can also go through the trading platform you are using and go through a list of IPOs that you can send in your bids for. 
• Allotment and Refund: After the IPO subscription period ends, shares are allotted. You may or may not receive the number of shares you applied for, depending on demand. If oversubscribed, allotment is done through a lottery system. Any excess funds are refunded to your bank account.
• Listing and Trading: Once the shares are allotted, they are listed on the stock exchange. You can trade these shares on the stock market like any other stock.
• Lock-In Period: Be aware of any lock-in periods specified by the company or regulations. You may not be allowed to sell the shares for a certain duration.

Additional Read: How you can analyse IPO?

Advice For Beginners 

• Investigate on your own: As a newbie, it’s critical to investigate and comprehend any investment you’re considering. Don’t rely completely on advice or suggestions from others. Acquire knowledge regarding the companies or assets in which you plan to invest, including their financial stability and growth prospects. This insight empowers you to make well-informed decisions and reduces the likelihood of impulsive choices influenced by external opinions.

• Diversify Your Portfolio: Risk management relies heavily on diversification. Spread your investments across various asset categories, including stocks, bonds, real estate, and different industry sectors. Diversifying mitigates the effect of a poor investment on your overall portfolio. You may boost your chances of having a diversified and robust investing portfolio by not placing all of your eggs in one basket.

Conclusion 

In conclusion, Initial Public Offerings (IPOs) are a dynamic facet of the financial world, offering both opportunities and challenges. They allow private companies to transition into the public market, raising capital for expansion and providing investors a chance to partake in their growth. However, IPOs can be risky, with price volatility and uncertainty. Success in IPO investing demands diligent research, a long-term perspective, and consideration of one’s financial goals and risk tolerance. Ultimately, IPOs exemplify the ever-evolving landscape of investment, where informed decisions can yield rewards, while hasty choices may result in setbacks.

Additional Read: Difference between IPO and FPO

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only.