What is IPO? Full Form, Meaning & How It Works

An initial public offering (IPO) is the first step for a company to get listed on the stock exchange. Big companies like Zomato, Nykaa, and Urban Company started their stock market journey through an IPO. 

Companies launch an IPO to raise capital for expansion, repay debt, fund new projects, or give early investors and promoters an exit route. Once listed, the company’s shares trade openly on the NSE or BSE, and anyone can buy or sell them. 

The popularity of IPOs in India continues to rise, with 108 IPO deals raising USD 4.6 billion in the first half of 2025. 

This blog explains the IPO full form, how the process works, the different types, and the benefits and limitations you should know. 

Introduction

Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time and gets listed on a stock exchange like the NSE or BSE. Through an IPO, the company raises capital from retail and institutional investors, and in return, investors receive ownership in the company proportional to the shares they buy. 

The capital comes from institutional investors, high-net-worth individuals (HNWIs), and the general public. Beyond funding, going public strengthens a company’s credibility, attracts media attention, and opens doors to future fundraising opportunities. 

Types of IPO

After knowing the IPO meaning, you must understand the different types of IPOs available in the Indian market. There are two common types of IPOs in India:

1. Fixed Price IPO

   In a fixed price issue, companies follow a straightforward process to set a predetermined issue price for shares by underwriting and analysing their liabilities, assets, and other financial data. Companies determine a fixed price of each share in this process, which remains constant throughout the IPO procedure.

   Since investors become aware of the stock price during the public offering, they have to pay the total share price in the application. Investors appreciate the fixed price issue because of its transparency.

2. Book Building IPO

   In a book building issue process, companies take a dynamic approach in determining the share prices by offering a 20% price band on them. In this price range, investors have to bid for the shares. An upper limit of the price range is called ‘cap price’, and a lower limit is known as ‘floor price’.

   Investors submit bids within the price range and indicate the quantity they want to purchase and the price they are willing to pay. This procedure offers flexibility and reflects the market demand.

   A fixed price IPO offers certainty: you know the share price the moment you apply. A book                building IPO offers price discovery: the final price emerges from investor demand within a set          band. Fixed price suits investors who prefer clarity upfront, while book building suits those                comfortable with bidding and willing to participate in price determination. 

How Does an IPO Work?

A company raises its capital from public investors by issuing shares with an IPO. Here is a detailed breakdown of how it works:

1. Recruitment of an Investment Bank 

   Companies identify an investment bank or underwriters to start the IPO process. The team evaluates a company’s financials and signs the underwriting agreement with the amount details. These experts act as a bridge between potential investors and the company.

2. Preparing for IPO Registration

   Companies adhere to the IPO guidelines of the Securities and Exchange Board of India (SEBI). They create a comprehensive statement and a Draft Red Herring Prospectus (DRHP). With these documents, investors get potential insights about a company’s financials and operations.

3. SEBI Approval and Verification

   Once companies make the registration statement and DHRP ready, they are submitted to the SEBI for approval. The SEBI verifies the information to ensure transparency and provides a green light to the company to go ahead.

4. Stock Exchange Listing

   After getting SEBI’s approval, a company can apply to list its IPO on any one stock exchange from the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

5. Roadshow

   Along with underwriters, a company conducts a roadshow and takes marketing initiatives to promote the IPO to potential investors. The marketing initiatives include advertisements and an investor presentation to promote the growth potential of the company.

6. Price Determination

   The offering price determination of the shares is a crucial task for a company. This marks the company’s official entry into public trading. This allows investors to trade its shares in the stock market.

7. Initiating the Bidding Process

   Investors can start placing bids in a specified price range once the price has been determined. In this phase, investors can adjust their bids before the final allocation.

8. Allocation

   Once the bidding process ends, companies allocate shares to successful IPO participants along with underwriters. There will be partial allotments to ensure fair distribution in case of partial allotments.

Benefits of Investing in IPO

1. Access to Capital

   Investors can access higher capital as the private companies receive cash flow from an IPO and achieve growth. Additionally, it allows the general public to become early investors and benefit from the company’s growth trajectory.

2. Increased Recognition

   Publicly traded companies get more recognition than private companies. In addition, public companies get more media coverage in the financial sector.

3. Liquidity

   A publicly traded company has better liquidity and marketability of its shares. After becoming public, its investors can trade its shares in the stock market.

4. Discount in Early Entry

   An IPO allows you to invest in a company at an early stage. This gives you an opportunity to buy shares at a lower rate than their post-IPO market price. This early entry offers you an advantage for higher returns in the long run.

5. Diversification

   IPOs facilitate portfolio diversification with a risk management approach. Through an IPO, investors can invest their funds in new companies beyond their existing holdings. However, diversification can reduce the risk related to investing in a single company or industry. This can eventually improve your return potential.

Risks of Investing in IPO

1. Volatilities and Uncertainties

   While IPOs provide a chance to invest in innovative and fast-growing companies, they are inherently volatile and carry significant risk. Without dependable performance and financial data, accurately evaluating the company’s full potential becomes challenging, increasing the likelihood of misjudgment.

2. Limited Information

   Investors have to deal with limited information about new companies while participating in an IPO. The reason is that private companies do not disclose the same level of financial details as publicly traded ones.

   This limited information can make it challenging for investors to analyse a company’s fundamentals and competitive landscape.

3. Higher Costs

   For beginners, IPOs can be quite expensive. The IPO transaction process requires an investment of higher capital in an underwriter, an investment bank, and an advertiser to run everything smoothly.

Who Can Apply for an IPO?

As you have understood the benefits and limitations of an IPO, you have to understand the eligibility criteria before applying for it:

1. You must hold a PAN card issued by the Income Tax Department of India to invest in an IPO.
2. You must have a valid Demat account.
3. Usually, investors do not have to open a trading account for an IPO. However, if he or she wants to sell the shares after getting listed, they have to open one. With PL, you can open both a Demat and a trading account without any hassle.

Key Terms Related to IPO

Things to Consider Before Investing in an IPO in India 

Since IPOs are highly volatile and are overvalued, you must consider the factors below before applying for one:

1. Check Company Fundamentals

   Always study the company background and analyse its financials before applying for its IPO. It is crucial to understand the growth potential of a company.

2. Understand Lock-in Period

   Check the lock-in period of an IPO, since this can limit your ability to trade IPO shares immediately after the initial investment.

3. Plan Your Investment Strategy

   Plan an investing strategy before applying for an IPO. Determining your risk tolerance and financial goals is crucial for this.

Conclusion

Understanding the IPO full form and how it works can benefit you with high liquidity, diversification, and provide access to capital. However, it also has a lock-in period and is costly. Investors must hold a PAN card and have a Demat account to apply for an IPO.

Download the PL Capital to stay up to date about the latest IPOs, market trends, and investment opportunities. Additionally, you can apply for an IPO with PL in just 5 steps.

FAQs on IPO

1. What is the difference between IPO and stocks? 

An IPO is the first time a company sells its shares to the public, while stocks refer to shares of companies already listed and trading on the stock exchange. When you apply for an IPO, you buy shares at the issue price set by the company. When you buy stocks, you purchase them at the current market price from other investors on the exchange. 

2. What are the risks of investing in an IPO? 

IPOs carry several risks you should weigh before applying. The company may be overvalued at the issue price, which can lead to losses once listed. Share prices often see high volatility in the early days of trading. Limited historical financial data makes it harder to assess long-term performance. There is also no guarantee of share allotment, especially in oversubscribed IPOs. 

3. Can a beginner invest in an IPO? 

Yes, beginners can invest in an IPO. You need a PAN card, a Demat account, a bank account, and a UPI ID linked to ASBA for application. Retail investors can apply for shares worth up to ₹2 lakh per IPO. Before investing, read the company’s prospectus (RHP), understand the business, and check the issue price against fundamentals. 

4. Can I sell shares immediately after an IPO? 

Yes, retail investors can sell their allotted shares as soon as the stock starts trading on the listing day, usually from 10 AM onwards. However, promoters and anchor investors are subject to a lock-in period during which they cannot sell their shares. This restriction exists to maintain price stability and signal long-term commitment to the company. 

5. Should I invest in an IPO on the first day or wait? 

Both approaches have merit. Investing on the first day gives you exposure at the issue price and potential listing gains if the stock opens above it. Waiting lets you observe initial price movement, post-listing volatility, and broader market reaction before committing. Your decision should depend on the company’s fundamentals, valuation, growth potential, and your own risk tolerance. 

6. How is IPO allotment decided? 

IPO allotment depends on the demand and supply of shares, investor category, and lot size. For retail investors, if the IPO is oversubscribed, allotment is done through a computerised lottery system, and each successful applicant gets at least one lot. Institutional and non-institutional investors are allotted shares on a proportionate basis. The final allotment is supervised by the registrar to the issue. 

7. Why do companies launch an IPO? 

Companies launch an IPO to raise capital from public investors for business expansion, new projects, or debt repayment. An IPO also provides an exit route for early investors and promoters who want to monetise their holdings. Going public increases the company’s visibility, strengthens its credibility in the market, and creates a platform for future fundraising through follow-on public offers. 

8. How much money is required to apply for an IPO? 

The minimum investment in an IPO is the cost of one lot, which usually ranges between ₹14,000 and ₹15,000. Retail investors can apply for shares worth up to ₹2 lakh per IPO. The exact lot size and price band are decided by the company and mentioned in the Red Herring Prospectus (RHP). You need a Demat account and UPI ID to apply.