As a stock market investor, you may encounter several terms and wonder what they mean or signify. One such term is “IPO.” An acronym for the Initial Public Offering (IPO), it refers to the process through which a private company goes public. If you’re new to investing, understanding what IPOs are and how they work is crucial, as they can offer unique opportunities for growth in your investment portfolio.
In this blog post, we have covered the ins and outs of IPOs, explaining what they are, how they work, why companies choose to go public, and how you, as an investor, can invest in them through the best trading app in India. By the end, you’ll be well equipped with the knowledge you need to confidently decide whether investing in IPOs is right for you.
What Is An IPO?
First thing first, let’s start with what an IPO means. As mentioned, IPO stands for an Initial Public Offering. It is the process through which a privately held company sells its equity shares to the public for the first time. When a company transitions from private to public, it opens up the ownership to anyone who buys shares on the primary market.
IPOs are often a company’s way of raising capital for further growth and development, and they’re usually marketed as a new, exciting opportunity for investors. However, not all IPOs are beneficial, and you must consider several factors before deciding to apply for the same.
Types of IPOs
Depending on the process through which their prices are determined, there are two main types of IPOs:
Fixed Price Offering
In a fixed-price offering, the company sets a fixed price per share before going public. This price remains constant throughout the IPO process, and the investors are required to pay the full price upfront when they subscribe to the IPO.
The issuing company collaborates with several entities, including financial experts, merchant bankers, and underwriters, to determine the IPO price.
Book Building Offering
Most of the IPOs these days are book-building offerings. In a book-building offering, the IPO price is determined through investor bids within a specified price range. The final price is set based on demand, and investors pay accordingly after allotment. In this method, the company adopts a dynamic approach to determine share prices.
As an investor, you will need to apply within a price band for book-building IPOs. The lower limit of the price band is known as the ‘floor price’ whereas the upper limit is known as the ‘cap price’.
Why Do Companies Go Public?
Companies typically choose to go public for several reasons, each tied to their strategic goals and growth objectives. Some of them include:
Raising Capital
The most common reason why companies decide to go public. IPOs allow them to access large amounts of capital from the public, which they can use to fund expansion, acquisitions, or research and development.
Greater Brand Visibility
Going public increases a company’s visibility, brand recognition, and credibility, which can help attract new customers and potential business partners.
Liquidity
Going public provides liquidity to the company’s early investors and founders, enabling them to sell their shares in the open market.
Employee Motivation
Public companies can offer stock options to employees as part of their compensation packages, improving employee retention and motivation. A few companies allow their employees to apply for their IPOs at reduced prices.
How To Apply For An IPO?
Now comes the most crucial aspect, i.e., how you can apply for an IPO. Applying for an IPO has become incredibly easy for retail investors with the advent of online trading app that streamline the process. Here’s how you can do so:
Open a Demat Account
A Demat account is mandatory for investing in an IPO. It holds your shares electronically, making it easier to manage your investments. You can open Demat account through various online trading platforms in just five minutes.
Go To Your Trading App
Once your Demat account is active, go to the online trading app that provides easy access to IPOs. Many apps also offer insights, notifications, and alerts to keep you updated on upcoming IPOs and market conditions.
Apply For The IPO
Find the IPO you’re interested in and apply for it through the trading app. Specify the number of shares you wish to buy and the price you’re willing to pay if it’s a book-building IPO. Sign up for the ASBA (Application Supported by Blocked Amount) through your bank account, which is usually linked to your trading platform.
Wait For Allotment
After the subscription window closes, wait for the allotment. If you receive an allotment, the shares will be credited to your Demat account, and you can begin trading once they’re listed on the exchanges.
Conclusion – Should You Apply?
IPOs are just one of the many investment options available to retail investors. The question of whether or not to apply for an IPO depends on your financial goals, risk appetite, and investment preferences. While investing in IPOs offers several potential benefits, such as early access to promising companies, listing gains, and diversification, it’s not suitable for risk-averse investors.
Stock trading and mutual fund app such as HDFC Sky can make the process easier for you with tailor-made investment suggestions, a user-friendly interface, and several other features.
HDFC Sky is the smarter route for wealth creation. Invest in IPOs within few clicks.