September 29, 2022
6 mins read
When people talk about an IPO, or Initial Public Offering, they usually mean the moment a private company finally steps into the public market. It allows the public to invest in a company with growth potential. The company, in return, receives the funds that it needs to finance its growth.
The IPO's meaning is broader than the sale itself. A firm may want funds to expand or sometimes to clear older financial commitments. Each company carries its own reason into the listing, and that is worth noting because these motives shape the offer.
For investors, an IPO can feel like an early doorway into a company’s future. Still, before moving too quickly, it is important to understand what an IPO means in practice and think about the risks that sit behind the excitement.
Summary
An IPO, or Initial Public Offering, is when a private company offers its shares to the public for the first time. This guide explains IPO meaning, history, types, process, pros and cons, and reasons companies go public. It also covers how IPOs work in the stock market, key risks for investors, and the steps to apply for an IPO wisely.
In the stock market, an IPO is the point where a privately held company opens its ownership to the public. One day it is a private company, and the next day anyone with a trading account can hold a part of it and buy and sell its shares.
Companies choose this step for a variety of reasons. Some want new capital to modernise infrastructure or expand into new territory, others want to clear old dues, and a few allow early investors to unlock value. All of this, the plans and the risks, is shared in a long prospectus that anyone can read.
After the IPO is complete, the shares begin trading, and the market steps in. Prices rise, fall, adjust and react to the collective decisions of thousands of investors each day.
The concept of IPO isn’t new. In fact, it has been popular amongst investors on Wall Street for decades. IPOs date back to 1602, when the largest commercial enterprise in the world back then, the Dutch East India Company, invited the general public to buy shares of the company.
Through the years, IPOs have gone through many uptrends and downtrends in issuance, and that can be attributed to innovation and economic factors. Of late, there has been a healthy rise in the upcoming IPOs. At this rate, it looks promising for the next few years too, unless there’s a big financial crisis like 2008, which resulted in the fewest IPOs that year.
Additional Read: How to Invest in an IPO Online
Going public involves a structured and highly regulated process that can be challenging for a company to manage on its own. When a privately held company decides to launch an IPO, it must be ready to face increased public scrutiny along with extensive documentation and detailed financial disclosures.
These requirements are set by the Securities and Exchange Board of India (SEBI) to ensure transparency and investor protection. The company must also establish systems and facilities to serve public shareholders efficiently. Once the management is confident about complying with SEBI regulations and meeting disclosure norms, the company starts promoting its intent to go public and attracting investor interest.
An IPO is broadly classified into two types, based on whether the company has announced the cost of its shares or not.
In a fixed-price issue, the company clearly states the exact price at which its shares are offered to investors. Applicants know in advance how much they must pay per share, bringing transparency and certainty to the investment process. Investors apply for shares at this predetermined price without participating in price discovery. This method is simple, predictable, and commonly used in smaller public issues where demand estimation is relatively straightforward for first-time issuers and cautious retail investors seeking pricing clarity overall.
A book-building issue follows a different pricing approach compared to a fixed-price issue. Instead of offering shares at a single predetermined price, the company provides a price band within which investors can place their bids. During the bidding period, investors indicate both the number of shares they want and the price they are willing to pay within the given range. Based on the demand and overall investor interest received at various price levels, the company, along with its underwriters, determines the final issue price. This process helps in efficient price discovery and reflects market sentiment more accurately.
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Preparation of the offer document: The IPO process starts with an offer document. It sets out with the company’s background, what shape its finances are in, and why it is turning to public money at this stage. For many investors, this becomes their first real introduction to the business, so the explanations need to feel clear, not overly technical, and detailed enough for someone trying to understand the company from the outside.
Role of the merchant banker: A SEBI-registered merchant banker works closely with the company during this stage. They help organise the disclosures, handle the back-and-forth with regulators, and make sure the information being shared is accurate, not missing anything important.
Filing the draft with SEBI: Once the draft is ready, it is filed with SEBI. A public notice appears in different languages so that investors who want to read the document themselves can do
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Companies issue IPOs to raise capital from public investors. This capital can be used for various purposes, such as paying off debts, expanding operations, investing in research and development, or funding business growth.
The IPO process includes several steps: preparing and filing the offer document with SEBI, receiving SEBI’s observations, opening the public subscription period, processing applications, allotting shares, and listing on stock exchanges.
Investing in an IPO can be profitable if the company performs well after going public, but it also carries risks. The success of an IPO investment depends on the company’s business potential and market conditions.
An IPO can be a good investment if you thoroughly research the company, its financials, and its future growth potential. However, it also comes with risks, as the company’s future performance is uncertain.
IPO shares can be sold once they are listed on the stock exchange. Investors can place a sell order through their broker or trading platform, just as they would with any other listed stock.
An IPO allows a private company to offer shares to the public for the first time. For investors, it means an opportunity to buy shares early, potentially at a lower price before the company’s value grows in the market. However, it also means taking on the risks associated with a new public company.
In an IPO, new shares are created and sold to the public to raise capital. In a direct listing, no new shares are created, and existing shares are sold directly to the public without raising additional capital. Direct listings often come with lower fees and less regulatory scrutiny than IPOs.
An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time, becoming publicly traded on the stock market.
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