IPO Meaning
IPO full form is Initial Public Offering and it is a process of offering shares of a private company to the public in a new stock issuance that helps the company to raise capital from public investors.
IPO is a big step for an entity because it changes the structure of a private organization into a public organization. It is the offering of a company to the public; thus, it is named as initial. The IPO process can also be done without raising any new capital by selling the shares of the existing stakeholders.
IPO is an opportunity for investors because they can earn high returns on their IPO investments. They are going to get a portion of their stake to the investors. An IPO issuer company is never obligated to repay the raised capital to the investors.
Types of IPO
There are two types of IPOs:
1. Fixed Price IPO
Under fixed price IPO, the share price is already determined before the company goes public and is mentioned in the offer documents submitted to the SEBI. Investors need to pay the full share price at the time of submitting an IPO application. The demand for an IPO can be evaluated once the issue is closed.
In the case of a fixed-price IPO, a prospectus is an offer document issued by the issuer company. It is all relevant to the issue such as price and number of shares type of securities being offered to the investors.
2. Book Building Offering
Under book building, the company offers a 20% price band on the shares to the investors. Investors need to bid on the shares and the final price is decided later by the company. For the bid, an investor needs to mention the number of shares he/she wants to buy and the price per share he/she is ready to pay. These bids will be used to finalize the share price and the price of an issue is discovered on the basis of demand in the market.
Red herring prospectus is issued in case of a book built public issue that consists of every detail of the issue except the share price.
IPO Investment Procedure
Securities and Exchange Board (SEBI) has defined the detailed process of an IPO. Here are the steps involved in the IPO investment process.
Step 1: Open a Demat and trading account with a stock brokerage firm. Many stockbrokers offer free trading account
Step 2: You can get the application form from the distributor or access it online.
Step 3: You need to fill in your personal details and details related to your demat and bank account.
Step 4: Lock your total investment amount in your demat and trading account.
Step 5: If you got the allotment of IPO shares, the money will be deducted from your account and the stock will be credited to your demat account within 7-10 days from the closing date.
Be an Informed Investor
Smaller investors should weigh the benefits and risks before investing in an IPO. You need to be an informed investor before participation in an IPO. Because returns and risks go together in stock market and IPOs are not the exception. Examine the market dynamic at the time of IPO issuance by a company. Therefore invest only after understanding the IPO basics.
Read the prospectus carefully. The prospectus of the IPO will be a great source of information for investors. However, do not rely on IPO prospectus only. Other than that, gather information regarding company fundamentals. Go through the financial details. You should know how your funds will be used by the company.
