What is IPO & How to Invest in IPO Online in India | Espresso

What is IPO & How to Invest in IPO in India

Recently, the Zomato IPO/Initial Public Offering created quite a furore in the market. Zomato itself created a hype through their popularly quirky social media handles. This led to many investors, including a few first-timers, getting excited about the launch.  

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If you were one of the people confused by the entire hoopla and about the intricacies of an IPO investment, here is a closer look at some common queries regarding an IPO, starting from the meaning of an IPO.

IPO Meaning in Share Market

The IPO full-form in the share market is Initial Public Offering. IPO/Initial Public Offering refers to a process where a privately held organisation goes public by trading its shares in the stock market. As a result, these organisations obtain capital from the primary market to further care for their businesses.

Investing in an IPO could be a smart move for you as an investor. However, not every investment in an IPO would be great. In the stock market, benefits and risks go hand-in-hand. So, before joining the bandwagon, you need to understand all the basics related to the same.

How Does a Private Company Offer an IPO?

Going public for a private limited company is an overwhelming process that’s tough for most of them to direct alone. Any private company that plans an IPO listing not only has to prepare itself for public inspection, but it also needs to file a lot of financial paperwork to meet the needs of the Securities and Exchange Board of India (SEBI).

Before becoming a public firm, a company hires an investment bank to handle the IPO/Initial Public Offering. Both of them then works out the monetary details of the IPO in an agreement. Soon after, they file for a registration statement with SEC, along with the underwritten agreement. SEC then scrutinises the information, and if deemed fit, it allows a date for the company to announce the IPO.

Why Does a Company Offer an IPO?

The primary aim of an IPO investment is to raise money from the open market. Every business needs finance to get going, expand, improve their services, repay their loans, etc. Trading stocks or shares in the market might mean increased liquidity.

Also, by doing so, the company opens the door for its employees to have stock ownership or other compensation plans of that sort. This policy also attracts the crème de la crème of talents in the organisation.

Also, when a company goes public, it essentially means that they have gained quite a good amount of success to get its name flashed in front of the world in the stock exchanges. It is, therefore, a matter of great pride and credibility for them.

When the market turns demanding, a company can always issue extra stocks. This paves the way for mergers and acquisitions as those stocks can be issued as part of a deal.

Why Should You Invest in an IPO?

Now that you know what IPOs are, you might be having thoughts of investing in an IPO. So, here are a few reasons why doing so might be beneficial for you:

  • By investing in an IPO, as an investor, you can gain some key advantages. If you can invest in the same at an early stage, you can get an early chance to own a stake in that company which might reap high returns in the years to come.
  • If you are looking for a long-term investment plan, IPO investments could be a great option for you. This is because, by doing so, you can also align yourself as an investor in the company’s future success.
  • An IPO investment is also a more transparent form of investment as its price per security should be explicitly stated for all public investors. Also, as every investor, big or small, has the same information, such investments equal the playing ground for all.

Things To Keep in Mind Before Investing in an IPO

So, now that you know the concept regarding IPOs in India and how they can benefit you if you invest in them, here are certain factors that you need to keep in mind before taking the final leap:

  • Before investing in an IPO, you should determine your investment criteria first. This will include your investment capital, your risk factors, and your long-term monetary goals. This way, it will be easier for you to select the IPO listing of your choice.
  • Before selecting the IPO listings, do exercise caution. You need to conduct a thorough round of research about the organisation’s valuation, fundamentals and past performances.
  • Please make use of every information available to you about the IPO listing, like the details in their prospectus. In addition, pay fine attention to the organisation’s plan of action, their future expansion goals, and every other important detail regarding their prospects.

How to Invest in an IPO?

So, now that you are sure about your investment plan, how do you start the process? It’s pretty simple. So, once you find an IPO of your choice for investment, you need to open a Demat Account at first, along with a trading account.

Here, you need to note that you’ll typically need a Demat account only for investing in an IPO. However, if you wish to sell those shares to the secondary share market in the future, you will need a trading account. Check whether your mobile number is linked to your bank account.

Make sure to analyse the IPO analysis provided by industry experts and leading publications. Investing in an IPO is subject to specific risks. Ensure that you do a thorough analysis of the company, the IPO price, future prospects, etc., before investing.

  • Log into the Trading Application or Website.
  • Navigate to the Upcoming IPOs section.
  • Choose the type of investor and the specific IPO you wish to apply for.
  • Enter your Bid Price and the number of shares.

You will also need to provide a duly filled and signed ASBA form, which authorises banks to block the money in your linked bank account for the purchase of an IPO. The total value of the shares you applied for will be blocked in your bank account. The entire amount will be unblocked if there is no allotment of shares. If there is a partial allotment, the applicable amount will be debited, and the rest will be unblocked.

Conclusion

An IPO/ Initial Public Offering investment could be a lucrative opportunity for you as an investor. However, a lot of research about the IPOs listed in the market is essential to save yourself from any financial risks in the future. So, choose wisely, and you shall thrive.

Share Market Knowledge Centre

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Frequently Asked Questions

There are two types of IPOs; Fixed Price Offering and Book Building Offering.

Having a Demat account is necessary to invest in an IPO. However, having a trading account will only be necessary if you wish to sell off your IPO shares in the secondary stock market in future.

Anyone who is an adult and is eligible to enter into a legal contract can invest in an IPO in India.

This is the price of a single share which is finalised by the issuer company based on the demand for the IPO after all applications are received.