IPO Investment: Meaning, Types & Benefits of IPO Investment| Espresso

Investment in an IPO and its Benefits

IPO or Initial Public Offering is a process whereby a private company offers shares to the public through new stock issuance. The objective of the IPO is to raise capital from the public. Multiple businesses, including several well-known companies, are launching their IPO with the intent to go public.

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As an investor, this gives you a chance to participate in the IPO and accumulate significant wealth by buying low and selling high. Hence, IPO investments create a buzz amongst investors and a rush to subscribe for companies with strong fundamentals. Moreover, when you buy shares in the IPO, you become a shareholder of the company by the size of the share value.

An IPO investment is a profitable opportunity. However, it is critical to understand the IPO in detail and evaluate the fundamentals of the concerned company before you apply for IPO.

Here is everything you should know about IPO investment and its benefits:

What is an IPO?

An IPO is a process through which the shares of a private company are offered to the general public for purchase. Typically, an IPO is a process by which a private company goes public and can raise funds for expansion.

Before an IPO, a company is considered private with a relatively small number of shareholders, such as friends, family and other professional investors like venture capitalists. However, an IPO gives a private company access to raise money by allowing the general public to hold shares in the company. When the company becomes public, it is listed on the stock exchange like NSE and BSE in India, and its accounts and other financial details are available for public consumption.

The entire IPO investment process is regulated by the SEBI (Securities Exchange Board of India) regulates the entire IPO investment process. Therefore, to file an IPO, the company must fulfil the conditions and regulations specified by SEBI.

What Are the Different Types of IPOs?

  • New Offer: The company is raising capital for the first time from the public
  • Follow-on offer: The Company is already listed on the stock exchange but wants to issue an IPO to raise additional funds.
  • Offer for sale: The promoters or anchor investors of a company sell only their shareholdings through an offer for sale.

What is the Need for an IPO?

Most companies choose an IPO to raise funds for expansion. Moreover, getting listed on the stock exchange adds credibility to a company, improving its borrowing prospects from banks and other lending institutions.

An IPO also gives the company leverage in deciding terms during events, such as loan meetings, mergers, acquisitions, etc. Private investors also use an IPO to gauge the company’s prospect and sell off their investments at high profits.

What Are the Benefits of an IPO Investment?

  • Wealth generation: IPO investments are equity investments. As a result, you can likely earn high profits in the long term and fulfil financial goals like buying a home, getting a car, creating a retirement fund, etc. Moreover, IPO price is generally the lowest if you invest in a company with strong fundamentals and high growth prospects. In the IPO, you get a discounted share price. So, you buy low, and when the company begins to generate high profits, the share price increases, and you sell high, generating substantial profits.
  • Listing gains: When you apply for IPO, you can earn a profit on the listing day itself. As per the IPO process, private companies mention their share price in the document after stock valuation. You can apply for IPO at that price. On the listing day, when the company likely opens at a high price on the stock exchange, you can make huge gains. 
  • An advantage over other investors: When you apply for IPO, you get an advantage over other traders who will enter the market late when the stock is already launched. These traders will miss out on potentially high listing gains and a chance to buy low. 
  • Strict IPO norms: To protect the interest of small investors, SEBI has made the IPOs more professional and safer. As an investor, the company gives you detailed information about its financials, management, risks, growth, performance, future plans through the prospectus. You can read the prospectus and make an informed decision regarding the best IPO to buy.
  • Transparency:In an IPO, the money is debited from your account only after the shares are allotted to you on the listing. There is no chance of fraud. 

Conclusion

As an investor, you should assess every financial and fundamental aspect of a company to select the best IPO to buy. The performance of an IPO depends on the market sentiment on the day, macroeconomic factors, and global factors. However, if you carefully select the best IPO to buy, you can potentially earn high profits from an IPO investment. If you want to apply for IPO, consult a professional broker to guide you through the process.

Share Market Knowledge Centre

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Frequently Asked Questions

Yes, you can buy an IPO as soon the underwriting bank approves the stock price, and the shares start trading on the stock exchange.

IPOs are usually profitable, but there is no guarantee of profits. The performance of the IPO depends on the market sentiment on the day of the listing. Moreover, macroeconomic factors, market volatility and global factors also impact the IPO performance.

The best IPO to buy is a company with strong fundaments, stable management and a promising prospect. You should assess each aspect in detail before you make the IPO investment.