Everything to know about IPO: A Beginner's Guide

If you've ever heard the term "IPO" thrown around in conversations about the stock market, you might be wondering what it's all about. IPO stands for "Initial Public Offering", and it's a significant event that allows a private company to become publicly traded. In this blog, we'll break down the concept of an IPO, walk you through the process of applying for shares, explain how allotment works, and explore the listing process on stock exchanges.

What is an IPO?

An Initial Public Offering, or IPO, is the process through which a private company offers its shares to the general public for the first time. Before an IPO, a company is usually privately owned, meaning that its shares are held by a select group of investors, founders, and employees. Going public through an IPO enables the company to raise capital from a larger pool of investors by selling shares in the open market. Why Do Companies Go Public?

Companies decide to go public for various reasons, and it's not just about raising money. Here are a few common motivations:

1. Access to Capital: Going public allows a company to raise a significant amount of capital by selling shares to a wide range of investors. This capital can be used for expansion, research, development, and other growth initiatives.

2. Liquidity: Founders and early investors often want to cash in on their investments. Going public provides a way for them to sell their shares and realize the value they've created.

3. Brand Visibility: Being listed on a stock exchange increases a company's visibility and credibility. It can attract attention from customers, partners, and potential employees.

4. Currency for Acquisitions: Publicly traded shares can be used as a form of currency for acquiring other companies. This can accelerate growth and diversification.
   

Things to Note Before Applying for an IPO

1. Research the Company: Understand the company's business model, financial performance, and growth potential. Look into factors like revenue, profits, market competition, and future plans.

2. Prospectus Review: Companies planning an IPO issue a document called a prospectus. This document outlines important details about the company's financials, risks, and operations. It's essential to read this thoroughly to make an informed decision.

3. Market Conditions: Keep an eye on the overall market conditions. A turbulent market might not be the best time to invest in an IPO, as it could affect the stock's performance post-IPO.

4. Valuation: Assess whether the IPO's offering price is reasonable in comparison to the company's financials. An inflated price could lead to disappointment down the line.

5. Long-Term View: Investing in an IPO requires a long-term perspective. The stock might experience fluctuations in its early days of trading, but focus on the company's potential for growth over time.

6. Consult Professionals: If you're uncertain about your decision, it's a good idea to consult financial advisors or experts who can provide personalized guidance.

Process to Apply for IPO Shares

Participating in an IPO can be a way for individual investors to become early shareholders of a company they believe in. Here's a simplified step-by-step guide to applying for IPO shares:

1. Research: Begin by researching the company that's going public. Understand its business model, financial health, growth potential, and market trends.

2. Choose a Broker: You'll need to have a brokerage account to apply for IPO shares. Choose a reliable and reputable brokerage that offers IPO participation.

3. Submit Application: When an IPO is announced, you can submit an application for a specific number of shares at the IPO price through netbanking ASBA or UPI method.

4. Funding: The funds for the IPO application is blocked from your bank account only, so maintain the required funds in your bank account before applying IPO.

5. Allocation: After the IPO subscription period ends, the company and underwriters (investment banks managing the IPO) determine how many shares to allocate to each applicant based on demand.

6. Allotment Status: Your broker / RTA(Registrar and Transfer Agent) will notify you of the number of shares you've been allotted. It's possible to receive fewer shares than you applied for due to over subscription.
   

Allotment Process

Allotment refers to the distribution of shares to different investors who have applied for the IPO. The allotment process is designed to ensure a fair distribution of shares among retail investors, institutional investors, and other stakeholders. Factors that influence allotment include the number of shares available, demand, and the proportion of shares set aside for different categories of investors. Note: If the IPO shares are allotted, the blocked amount for IPO bid application will be debited from your bank.

Listing on Stock Exchanges

Once the allotment process is complete, the company's shares are listed on a stock exchange, which allows them to be traded in the secondary market. The secondary market is where investors buy and sell shares among themselves after the IPO is over. The opening price on the first day of trading is often determined through a price discovery mechanism involving supply and demand dynamics.

Conclusion

Participating in an IPO can be an exciting opportunity for investors to become part-owners of a company they believe in. It's essential to conduct thorough research and understand the risks before investing in an IPO. The IPO process involves submitting an application, going through the allotment process, and finally witnessing the listing of shares on a stock exchange. While IPOs can offer substantial rewards, they also carry inherent risks, and it's crucial to make informed decisions based on your financial goals and risk tolerance.