What are the Most Popular Common IPO Terms Everyone Must Know?

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IPOs are a celebration in the investment world, where highly anticipated entities eagerly enter the market offering their shares to the public for the first time. This enables the awaiting investors to get their first bid on the shares and lets the market know that there is a new player in the field. The IPO process is complex and there are many terms and conditions for an IPO. Since this is such an important event in the world of shares and securities, it would be worthwhile to make note of some of the most important IPO terms. 

What are the Key Terms Related to an IPO?

1. Initial Public Offering (IPO)

Let’s start with the term IPO itself. It stands for Initial Public Offering, which is quite self-explanatory. This is a process that helps the investors subscribe to the shares of a company for the first time. The primary reasons for a company to go public are to raise funds and expand capital. 

2. Prospectus

A prospectus is a document offered by the company during an IPO. This document acts like a marketing brochure and provides key details about the IPO. It includes essential information about the company such as the nature of its business, its financial data, and other such details. This document aids in getting an idea about the company and deciding whether you would like to invest in its IPO. 

3. Issue Price

During the IPO, the company fixes an issue price at which the shares will be offered to the market. This price is fixed after considering aspects such as the financial health of the company, the prevailing market conditions and the demand from investors for the company’s shares. This brings us to the next term - book building.  

4. Book Building

Book building refers to fixing a price band for the investors to bid within. This process helps the company in coming up with an issue price. The final value of the issue price is decided based on the bids that are made by the public. Book building helps an organisation in coming up with a fair market price for its IPO.  

5. Underwriter

Underwriters play an important role in an IPO, because an IPO is usually managed by an underwriter. These are financial institutions or investment banks that specialise in valuation. They help with the issue price determination, promoting the shares, and in making sure the IPO turns out to be successful. Underwriters also purchase unsold shares, if any, to back the IPO. 

6. Lock-up Period

Lock-up period is a time period that follows an IPO. During this lock-up period insiders to the company are not allowed to sell their shares. This usually lasts anywhere between 90 and 180 days and this helps in stabilising the stock price. This rule exists so that insiders to the company such as company executives and shareholders who might have received the share on a subsidised value do not sell it immediately after the IPO to exploit the surge in its market price. 

7. Flipping

Flipping is a process where people buy a company’s shares during its IPO, and then sell it shortly after to exploit the surge in the market price. Unlike the insiders to the company, third parties are not subject to restrictions in doing this. However, since third parties are not privy to special prices or sensitive information about the company, it is also risky for them to ‘flip’ the shares.  

8. Greenshoe Option

The greenshoe option is also referred to as an over-allotment option and this provides underwriters with an option to sell a higher number of shares than it was initially planned for the IPO. This is often done when there is an overwhelming demand for the company’s shares in the market. This option offers flexibility and it aids in stabilising the stock price. When there is excess demand for the shares and it's not regularised, it can destabilise the stock price. 

9. Red Herring Prospectus

A red herring prospectus is sort of a model prospectus for demonstration. This includes the crucial data about the IPO with the exclusion of details like the issue price and number of shares offered. This is distributed to get an idea of the overall interest that the company’s announced IPO has generated. 

10. Price Band

Price band refers to the range within which the investors should bid for the company’s shares when they apply. As with any range, it has an upper limit and lower limit. After receiving the bids an issue price is fixed based on the bids received. 

11. Subscription

Subscription is the process where investors apply for shares. The volume of subscriptions indicates the demand held by the company’s shares. An oversubscription refers to a higher demand than anticipated, and an under-subscription indicates a lesser demand than expected. 

12. Allotment

Allotment refers to the act of assigning shares to investors based on their application, and an overall analysis of all the applications. People don’t always get allotted all the shares they asked for. Sometimes they are allotted part of the shares that they demanded. Allotment finalises who gets how much. 

13. Listing

Listing is the process where a company’s shares are admitted for trading in the stock market. When a company gets listed on a stock exchange, its shares can be bought and sold by the public in the market. Listing makes a company’s name stand out, and be visible to the investors. It also provided a company’s shareholders with liquidity. 

14. Anchor Investors

Anchor investors are institutional investors who are invited to subscribe to the shares before the issue opens to the general public. Their participation builds confidence among other investors and may result in better pricing and demand for the shares.

15. Grey Market

The gray market refers to the unofficial market for trading in shares before they get listed on the stock exchange. The gray market may indicate demand and potential post-listing performance of the IPO, but trading on this market is nothing but pure speculation and is not regulated.

16. Cut-off Price

The cut-off price would be the final price at which the shares are allotted to retail investors in a book-building IPO. This option is available to retail investors in a book-build IPO, who would mean that their rate would be discovered through the process of book-building.

17. Price Discovery

Price discovery is the process of arriving at an appropriate price for the shares being issued under the IPO, which embodies detecting investor demand, market conditions, and the financial health of the company. Effective price discovery assures fairness and balance in the valuation of shares.

18. IPO Grading

The IPO grading is a grade issued by credit rating agencies that assesses the fundamentals of the company and also rating for risks associated with the IPO. This would help the investors in decision-making, for it is an independent judgement about the company prospects.

What are the Steps Involved in the IPO process?

1. Appointment of Underwriters: The company hires underwriters (generally investment banks) to manage the IPO process.

2. Filing with SEBI: A registration statement would be filed by the Company with SEBI, along with the draft Red Herring prospectus.

3. Due Diligence: Proper due diligence would be followed by underwriters wherein their accounts and legal teams will go through the financials, operations, and legal compliances pertaining to the company.

4. Roadshows: The company and underwriters make roadshows to pitch the IPO to some type of institutional investors to gauge the interest.

5. Book Building: The investors place their bids in this price band. A final issue price is decided based on the bids obtained.

6. Allotment of shares: Shares are allotted to investors, and refunds to those for which no share was allotted.

7. Listing on Stock Exchange: Company's shares get listed in the stock exchange and trading starts.


Any investor who wants to take advantage of the primary market must be aware of all key terms and steps associated with an IPO. This is because the IPO terms and conditions are many. By letting you know these IPO terms, you shall be in a very good position to make informed decisions, mitigate risks, and be able to take advantage of numerous investment opportunities. Though complex, the IPO process is very relevant for companies and investors with the aim of growth and financial success.

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. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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