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What is IPO? | Understanding Initial Public Offering


What is IPO, Initial Public Offereing

Table of Contents:

What is an IPO?

You may have often come across the term IPO, when you read a newspaper or listen to news and or by somebody at work with you and you know that its something related to Stock Market. If you want to know what exactly it is, Continue Reading or if you are new to stock markets, you can first read out our article about NSE and BSE | Sensex and NIFTY.

IPO is an abbreviation for three words

Initial- it denotes, ‘for the first time ’

Public- Public refers to retail investors, HNIs, institutional investors, and other corporations

Offering- It implies to want to share the portion of their profit

All in all, it IPO means a company is offering its shares for sale to the public for the first time. More descriptively, when an unlisted company ( a company that is not listed on a stock exchange) decides to raise funds through the public through the sale of its shares for the first time, it is said to be IPO.

Now what is the need for an IPO or why does not every company brings one of its own?

One needs money to run and grow its business and An IPO is used by small or large companies for raising funds through the public, to infuse fresh capital, to expand its business, or to improve its existing ones. There may be a need for funds for the working capital requirements. A Company may have other options also to raise funds like taking a loan from a bank, but the company might have assessed the IPO channel as beneficial for its own. Or the company may have already taken loans and now needs more money which the banks might not avail them of. All in all, when the purpose of a company is to raise funds and they are ready to sell their shares to the public, an IPO is brought.


Advantages of an IPO

Since it is no loan, there is no repayment. A company receives funds which it does not have to pay off. Even there is no interest being charged on this amount (however, a part of the profit is to be shared with shareholders). This fund raised can be used for disposing of any other debts which will improve the company’s balance sheet.

Since it is going to be listed, the company comes in the limelight and this is no less than marketing for that company. People get to know about the company and also researches for its background and history and sales etc. This way the company will be in the news and indirectly receiving publicity.

Also, whenever a Company gets listed in any stock exchange, it has to go through certain regulatory frameworks enforced by SEBI (Securities and Exchange Board of India) which prevents fraud. The balance sheet and the accounting practices of the company also become more transparent.


Who can invest in an IPO?

There are broadly three types of investors:

Retail Investors: Those investors who will invest for subscribing in an IPO for a value of less than Rs. 2,00,000/-. Chances of getting an allocation are higher as SEBI has designed the allotment system as the maximum retail investors should be included.

Institutional Investors: These are the institutions like mutual funds companies or insurance companies which invest in IPO. However, a lock-up contract may be signed with these institutions to maintain the volatility of the stock after listing.

HNI or High Networth Individuals: Those who invest in IPO for a value more than Rs. 2,00,000/- are called as HNIs. The proportion of allotment to HNIs is also pre-disclosed.

Most of you who are reading this article would come under the Retail investor or HNI Category. You should have a valid PAN issued by Income Tax Department and a Demat account. You can apply through ASBA (Application Supported by Blocked Amount) mode also.


Investment in IPO

When you look for an IPO of a company, you should become familiar with the following terms:

Issue Opens: It is the date from which you can apply for IPO

Issue Closes: It is the date on which IPO will be closed for bidding.

Issue Price/ Floor Price: It is the price or the price range at which you have to bid for the IPO.

Lot Size: It is the minimum no. of shares to be purchased collectively for bidding.

Minimum No. of lots:  It is the minimum no. of lots to be purchased.

Date of allocations: The date on which the shares will be allotted to the investors.

Date of Listing: It is the date on which the share will finally get listed on the stock exchange and you can trade in it.

Over Subscription: When there are more applications to buy the share than the number of shares that they have issued, it is called Oversubscription.

Under Subscription: When there are fewer applications to buy the share than the number of shares that they have issued, it is called Under- subscription.

Bid-range- The IPO issue price is in a range called bid range. If you want to get allocation for IPO, you should bid with the highest price in the bid range as it increases your chance of getting allocated 

Before investing in an IPO, you should make your assessment of the company. It’s good or bad attributes and the risks involved in investing in it. Here is a little guide regarding the procedure you follow to buy an IPO, You should apply through ASBA, You can apply to the IPO after the issue opens. choose the no. of lots you want to apply for and go for a payment. The amount as per your Bid Price and no. of lots will be blocked in your account but will not be debited. 

On the date of allocation, if you got the subscription, the shares are allocated to you and the amount is debited from your account, If you do not receive the allotment the amount blocked gets unblocked. After the stock gets listed on the exchange on the date of listing, you can sell the shares and trade in them as other equity stocks. Also, the option for buying more shares will get open after its listing.

Key Takeaways

IPO is used by companies for raising funds through public by sale of shares. You should do a self-assessment of any company’s IPO before investing I it. If you have a PAN and a Demat account, you can proceed with buying one when issue opens.

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