IPO Basics

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An IPO, or Initial Public Offering, is a crucial event for a company as it marks its transition from being a privately owned entity to a public-owned company. This process allows companies to raise capital from investors by selling a portion of their ownership through the issuance of shares. The capital can be used for research and development, business expansion, introducing a new product or loan repayments.

Let us learn about the IPO basics, its types, advantages and disadvantages, and various terms associated with it.

What Is an IPO?

IPO, short for Initial Public Offering, refers to the process through which a company offers its shares to the public for the first time. It is a means for businesses to raise funds. It also allows retail investors like you to become a shareholder and own a portion of the company. 

The shares are typically traded on a stock exchange, where buyers and sellers can exchange ownership in the form of shares. By launching an IPO, the company allows the public to participate in its growth and success.

Types of IPO

There are two types of IPO. They are – 

Fixed Price Offering

In a fixed price offering, the price at which the shares are offered to the public is predetermined and remains fixed throughout the entire IPO process. All investors who participate in the IPO purchase the shares at the same issue price, regardless of the demand or market conditions. 

This type of IPO is simpler and more suitable for smaller companies or those with a stable valuation.

Book Building Offering

Unlike a fixed-price offering, a book-building IPO allows the public to determine the price of the shares through a bidding process. You get to choose the amount with which to buy shares within a certain price band determined by the company. The final price is determined based on the demand generated during the book-building period. 

This type of IPO is more flexible and better suited for larger companies or those with a fluctuating valuation.

IPO Advantages and Disadvantages

The advantages and disadvantages of investing in an IPO are listed below – 

Benefits of Investing in an IPO

Investing in an IPO can provide several advantages to both individual and institutional investors. 

  1. IPOs offer the potential for significant returns, especially if the company experiences rapid growth after going public.
  2. Investing in an IPO allows investors to become part owners of a promising company.
  3. IPOs often receive substantial media attention, which can increase the visibility and credibility of the invested company.
  4. Investors can make quick listing gains from IPOs of reputable companies. 

Additional Read: Benefits of Investing in IPO

Disadvantages of Investing in IPO

Despite having several advantages, investing in an IPO also carries inherent risks. 

  1. The primary risk is the possibility of substantial price volatility, especially during the initial trading period. 
  2. It is important to note that not all IPOs turn out to be successful, and you may lose a significant portion of your investment.

Terms Associated with IPO

When dealing with IPOs, certain terms commonly used in the process include demat account, underwriter, prospectus, lock-up period, and quiet period. 

  • A demat account stands for a dematerialised account for holding investments like shares, units of mutual funds, bonds and government securities. 
  • An underwriter is a financial institution responsible for managing the IPO and finding investors. 
  • A prospectus is a document that provides essential information about the company, its financials, and the risks associated with investing in the IPO. 
  • The lock-up period refers to a specific time frame after the IPO during which company insiders, such as employees and executives, are restricted from selling their shares.
  • A quiet period is a time after the IPO when the company is prohibited from issuing communications that may influence the stock price.

Summing up

An IPO is a significant milestone in the life cycle of a company, as it provides an opportunity for it to raise funds and expand its operations. It also allows you to participate in the growth of a promising company. However, investing in an IPO should be approached with caution and thorough research, as it carries both advantages and disadvantages. Having a basic knowledge of IPO is essential for making informed investment decisions.

Bajaj Broking offers the flexibility of easy demat account opening and a hassle-free trading platform. You can stay up-to-date with the latest news on upcoming IPOs here and have all your IPO application details pre-filled for your convenience. 

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Frequently Asked Questions

How to sell IPO shares?

Answer Field

Once the IPO shares are allocated to an investor, they can be sold through a brokerage account on the stock exchange after the listing process. You can place a sell order specifying the desired quantity and price at which you want to sell the shares. The sale proceeds will be deposited into your account upon the completion of the transaction.

Is an IPO a good investment?

Answer Field

IPOs can be a good investment opportunity if you believe in the growth potential of a company. It is crucial to evaluate the company’s financials, industry trends, management team, and competition before making an investment decision.

Are IPOs profitable?

Answer Field

Investing in an IPO can be profitable if the company experiences significant growth and the stock price increases. However, it is important to note that not all IPOs turn out to be successful, and there is a level of risk involved. Proper due diligence and research are necessary to assess the profit potential of an IPO.

How does an IPO work?

Answer Field

During an IPO, a company hires an underwriter, typically an investment bank, who assists in determining the share price and finding potential investors. The company then files a draft prospectus, which contains essential information about the company and its offering. Once it gets regulators’ approval, the company can launch its IPO to investors. Once the IPO closes, shares are allotted and listed on stock exchanges.

What do you mean by an IPO?

Answer Field

IPO stands for Initial Public Offering. It refers to the process through which a privately owned company offers its shares to the public for the first time, allowing investors to become shareholders and own a portion of the company.

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