IPO Investment : What It Is and How Does It Work
From fintech and logistics to food-tech and apparel, companies across a diverse range of sectors have launched their Initial Public Offerings (IPOs) in recent times. In 2023 too, the IPO pipeline is robust, with some highly anticipated IPOs likely to be launched soon.
If you are keen on investing in IPOs, but don’t know how to begin, then we have got you covered!
In this article, we will help you get a basic understanding of IPOs:
- What is an IPO
- Why Does a Company go in for an IPO
- How Does an IPO Work
- Key IPO Terms to Know
- How to Invest in an IPO
Note that for IPO investment, you need to have a Demat account.
Open a Demat account with PL within minutes, by clicking here
What is an IPO
The process through which a private company offers its shares to the public for the first time is called an Initial Public Offering. These shares are offered to investors through the Primary Market, for a specific period. After that, the company gets listed on the stock exchanges and its shares are traded in the secondary market. Simply put, an IPO is the transition from a privately held company to a publicly traded company.
Approval from the market regulator SEBI, i.e. the Securities and Exchange Board of India is mandatory before any company can launch its IPO.
There are two types of IPOs:
- Fixed Price Offering: As the name suggests, in this type, the company announces the price per share of the IPO in advance. All applications and allocations will be at this pre-determined price.
- Book Building Offering: Here, the company relies on a price discovery mechanism by announcing a 20% price band – comprising an upper and lower limit – for the shares. Investors can bid for the number of shares and the price they are willing to pay. Based on these bids, the final price at which the shares will be issued to the investors is determined.
Why Does a Company go in for an IPO
Opting for an IPO comes with many benefits for a company. Here’s a look at some of the key ones:
- An IPO enables a company to raise funds through the capital market.
- It can use this money for a variety of reasons, including expanding its business, undertaking capex, paying off debt, and so on.
- When the shares are traded in the capital markets, it brings in higher liquidity and price transparency.
- An IPO could increase the credibility and publicity of a company.
How Does an IPO Work
By now, you must have a basic understanding of what are IPOs and why companies prefer to go public. Now, let us take a closer look at how an IPO works.
Pre-IPO:
Once a company decides to go in for an IPO, it has to work with investment banks to chalk out all the details of the IPO. It also needs to file a Draft Red Herring Prospectus (DRHP) with the SEBI. This is also called an ‘Offer Document’ and comprises details about the company’s business, risks, why it is going in for an IPO, how the funds will be used, etc. The SEBI may ask for changes, if required, in this document.
After making these changes, and getting approval from the SEBI, the BSE and the NSE, and the Registrar of Companies (ROC), the Red Herring Prospectus (RHP), or the ‘Final Prospectus’ is filed by the company. This comprehensive document enables potential investors to make an informed decision about IPO investment.
Once approved by the SEBI, the company can launch its IPO in the primary market. The company will then announce details such as lot size, price band, and opening and closing date of the IPO.
During IPO:
Investors can apply for an IPO during a specific period.
The allotment of shares depends upon the demand for the IPO. If an IPO is oversubscribed, then the allotment happens through a computerized process, and if it’s undersubscribed, then the investors may get the shares they bid for.
On the Listing Date, the company gets listed on the stock exchanges. Whether it lists at a premium or discount to its issue price is again a result of demand for the shares.
This brings an end to the IPO process. The company is now a publicly listed company, with its shares trading in the secondary market.
Key IPO Terms to Know
For IPO Investment, here are some of the key terms you need to know:
- DRHP / RHP: A comprehensive offer document that a company has to file with the SEBI, comprising details about the company’s financials, business model, risks, opportunities, and why it has decided to go public.
- Floor Price: The minimum price you can choose, while applying for an IPO
- Upper Limit: The maximum price you can choose, while applying for an IPO
- Cut-off Price: The price at which shares get allotted to the investors
- Lot Size: Minimum number of shares you need to purchase, when applying for an IPO
- Listing Date: The date on which the company gets listed on the exchanges
- Anchor Investors: A portion of the IPO is reserved for institutional investors, such as banks, financial institutions, mutual funds houses, etc. These are called anchor investors
- Oversubscribed & Undersubscribed: If an IPO receives applications for more shares than it offered for sale, then an IPO is said to be oversubscribed. If it receives applications for fewer shares than it offered for sale, then an IPO is said to be undersubscribed
How to Invest in an IPO
IPO investment has now been made very simple, efficient, and convenient. Investors can invest in IPOs online, once they open a Demat account. You can open a Demat account with PL within minutes, by clicking here
IPO investment enables you to get early access to companies that have a high growth potential. But you also need to be prudent, undertake due diligence and have an IPO investment strategy in place that is aligned with your own risk appetite and investment horizon.
PL’s in-house team of experts can help you on that front. Our team of qualified professionals can analyse your portfolio and recommend the right IPO investment strategy for you.
You can invest in IPOs with PL in less than a minute. If you aren’t a PL client, then open a Demat account with us by clicking here
Next, download the PL DigiTrade App or visit our website and follow the simple steps:
- Choose the IPO and click on Bid
- Enter bid and lot details
- Finish the application by accepting the UPI mandate request
PL provides instant bid confirmation from the exchanges, enables you to track your bids easily, and ensures hassle-free and automatic refunds in case of no allotment.
So start your wealth creation journey today, with PL’s research-backed advisory and personalised guidance.