Initial Public Offering (IPO) | IPO Definition

What is Public Offering? Initial Public Offering definition

Initial Public Offering (IPO)
Initial Public Offering (IPO)
A public offering is the sale of equity shares or other financial instruments to raise capital to the public. The capital raised may be intended to cover operational shortages, wealth business expansion, or strategic investments.

Financial instruments offered to the public may include equity stakes, Such as common or preferred shares, or other assets that can be traded like bonds.

Generally, any sale of securities to more than 35 people is considered a public offering, and as such is required to file a registration statement with the appropriate regulatory authorities.

There are many reasons for a company to go public. Primarily, a company decides to go public to raise more capital or money to promote its growth.

A company can increase it's brand and market value by making it public. Stocks can be used for mergers and acquisitions instead of cash and to retain talent in an organization as they provide simplicity to the company.

Initial Public Offering (IPO)

An initial public offering is a process that enables unlisted or private companies to be made public so that capital can be raised either to promote the expansion of debt or business or for promoters to dilute their stake in the company.

This is a great way through which a person can buy a stake in the company which was not possible before. The IPO would basically represent the first time a company has a financial benefit from its stock issue.

IPO Investment

However, post the initial public offering, the underlying company will not receive any compensation, but there will be a share transfer between buyers and sellers on the open market.

IPOs are very attractive to investors as their initial offer is more likely to lead to higher share prices.
IPO Definition

Initial Public Offering Process

Soon after the company goes public, it hires an investment bank to manage the entire process. Further, both decide the amount of money, the type of securities to be issued, and other necessary details.

The underwriter then puts everything into a document called the Red Herring Prospectus (RHP). This document contains all the necessary details about the company except the effective date and offers price.

In general, the IPO is open for 3-7 days, but still, the actual number of open days is decided by the issuing company and its chief manager.

Benefits of investing in an IPO

How to invest in  IPO

IPO investment is essentially a form of investment in the equity market. As such, they are known to bring substantial returns over a long period of time and, therefore, greatly benefit long-term investors.

An IPO may be the right option to achieve your financial goals.

Important points to consider before investing in an IPO

Like all investment opportunities, while an IPO is an attractive option in itself, an investor should nonetheless consider a few important points before the jump.

These points can make all the important differences: is the IPO a good investment for you?

Before investing in an IPO, it is most important to form a clear idea about your risk appetite, investment budget, and financial goals like yours.

It is only by locating these factors that an investor can narrow the IPO listing that best fits his portfolio.

The firms advertise their upcoming initial public offerings. Before investing, see the firm's past records and statements. It is also important for the investor to know the future plans and objectives of the firm.

Avoid drifting into initial excitement or hype around IPO listings. Instead, it would be better to do your own research and make a point of investing in businesses you understand or in which you have expertise.

A higher promoter is always better because it tells us a sense of responsibility and preferably the promoter will try to take the company to new heights

Watch for IPO issue size. The larger the problem size, the greater the potential of the promoter. Do not forget to do background checks on the capabilities of the promoter.

Watch for projects in the pipeline and its size as it tells us about the company's scalability going forward

Bidding process

"Each IPO needs to buy a minimum number of shares to buy subscribers. This is called lot size. While applying for the IPO, you have to submit your bid details as per the lot size mentioned in the prospectus".

"You should ensure that you have sufficient funds in your account. The maximum membership amount for retail investors is 2 lakhs".

"You bid online for an IPO through your Demat and online trading account. Most leading broking firms, such as Xeroda, Angel Braking, and Upstok offer this feature".

"An online IPO application is an easy and convenient way to apply for an IPO to be listed on a stock exchange".

"You can also subscribe to an IPO offline person by going to the local office of your breaking firm and submitting the required documents, but online applications are now the preferred mode".

"You can invest at the cut-off price or place bids, but note, only retail investors can bid at the cut-off price".

"If you bid at a lower price and the issue / cut-off price is higher, your chances of being charged are reduced. For example, if the price band is 90–100, So you bid at 93 and the cut-off comes at 96, you are unlikely to get any shares".

"To increase the probability of allocation, especially in an offer that may be oversubscribed, you need to bid at the cut-off price".

"But since the cutoff price is not the time to bid, so the application is at the cap price".

"If the application price is high, the price difference between the application and the cut-off price is refunded after allocation".

Offline application form

Fill out an application form for IPO allocation. You can get it from brokers or agents selling mutual funds. Also, attach a check for the value of the shares you want to buy.

Check the minimum limit on the number of shares you can buy. The application form will contain all the information. Submit the form manually.

Online application for IPO

The online IPO application facility is available with ASBA (application supported by blocked amount).

The advantage of an online ASBA method is that you will pay money only when the shares are held by you. In the online application, a person can use their internet banking to apply. 

Open an online trading site and go to the IPO page to help you choose which IPO you want to apply for. Enter the number of shares you have chosen to bid, along with the bid price.

You can make a maximum of three bids. Once you submit your application, you receive an IPO application number and other transaction details.

IPO Applicants Following are some types of investors who can apply for the firm's IPO:

RII - Retail individual investor applies for a small value.
NQII - Non-Qualified Institution applies to the previous investor for a larger value. NRI covers NRIs, Firms, Societies, and Trusts.
QIB - Qualified Institutional Buyers means Financial Institutions having SEBI registration.

Allotment of shares

Often in a successful IPO, the demand for the actual number of shares issued in the market increases. As a result, you may receive fewer shares than you bid.

Sometimes, no one can be allocated to you. In such cases, the bank issues your blocked bid amount in part or in full.

If you are lucky enough to receive your full allocation, you will receive a Confirmation Allocation Note (CAN) within six working days after the IPO process closes.

Once the shares are allotted, they are credited to your Demat account. The next step is to wait for the listing of shares on the stock exchanges, which is usually done within seven days.

After that, you can choose to hold shares or trade with them. But your IPO membership is full.

Risk Factors in IPO Investment
Initial Public Offering (IPO)

Not all IPOs are successful. Some IPOs crash after publicity. Many investors suffer huge losses from selecting the wrong initial public offerings.

Therefore, great care must be taken when selecting a firm. Investing in an IPO should be a well-planned decision. Sometimes, the firm's data is not available for proper research.

No investor knows what the future value of the firm will be. Most companies are during a period of growth and are therefore unstable.

How to buy an IPO in India?

The first and most important step is to understand the underlying company before applying for an IPO.

The best way is to describe the company's performance in the past, its aspirations in the future. Below are the steps to invest in an IPO in India:

Choose the IPO of the right company to invest. Get complete information about the potential company by researching its prospectus on the website of the Securities and Exchange Board of India (SEBI).

Understand the company's business plan, key strengths, the performance of the date, and the purpose of making wise decisions.

IPO definition

To open a Demat cum trading account. A Demat account provides the facility to buy and sell stocks online. Whereas you can open a Demat account through any brokerage house or discount brokers.

To apply through your trading account, you need to understand ASBA (Application Supported by Blocked Amount).

An application that allows banks to block money in your account at the time of placing bids for IPOs.

To invest in an IPO along with the IPO details, the bid number, the size you want to invest in.

You have to agree to block the funds for such investment, which will be used on allocation.

ASBA also eliminates the need to apply through demand draft, and with the use of Demat account number, bank account number, and PAN number, any investor can apply online.

Bidding is the next step. The minimum number of shares specified in the company's prospectus should be applied within the prescribed bid price range.

IPO Investment

The lowest price is known as the minimum price, and the highest price is called the cap price. Once the price is chosen, this amount is blocked until the allocation of shares.

Once the bid is completed, you will be allocated shares, based on the investor response to the IPO. Keep in mind one thing, there are possibilities that you may get less than the number of shares asked for, or in some cases.

Such instances arise due to the huge demand in the market. When such incidents occur, the bank unblocks your bid money.

However, if you get a full allocation of shares, you will be issued a Confirmation Allocation Note (CAN) within 6 days after the closure of the IPO, and the next process is to wait for the list of shares on the stock exchange.

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