The Indian stock market has always provided chances for both experienced investors and newbies. An Initial Public Offering (IPO) is one of the most widely anticipated events in this era. An IPO represents a company’s move from privately held to publicly traded status, allowing individuals to buy a piece of the business. It’s a method that will enable businesses to raise funds and investors to invest early in a potentially profitable endeavour. However, as with any financial choice, IPO investments have both risks and rewards. In this blog, we’ll go over the fundamentals of IPOs, including their types, benefits, drawbacks, and everything in between, to help you make informed judgments in the volatile world of investing.
What is IPO?
An initial public offering, or IPO, is the process by which private businesses sell their shares to the general public to generate equity capital from investors. An IPO transforms a privately held company into a publicly traded one.
Additionally, this technique gives astute investors the chance to profit handsomely from their investments.
If you are an educated investor, investing in initial public offerings (IPOs) may be a wise choice. A new IPO is only sometimes a fantastic opportunity, though. Risks and benefits are mutually exclusive. It’s crucial to comprehend the fundamentals before jumping on the bandwagon.
What is IPO in stock market?
Initial Public Offering, or IPO, is the procedure by which a private firm or organisation can go public by selling investors a piece of its interest.
An initial public offering (IPO) is typically launched to infuse the company with new equity capital, facilitate the trading of existing assets, generate money for the future, or monetise the investments made by current stakeholders.
The prospectus provides information about the initial share sale to the public, high-net-worth individuals (HNIs), and institutional investors. Detailed information about the prospective offerings is contained in the prospectus, a long document.
Following the completion of the initial public offering (IPO), the company’s shares are listed and available for free open-market trading. The stock market sets a minimum free float for the shares, both in absolute terms and as a percentage of the entire share capital.
Types of IPO
IPOs come in two common varieties:
1. Fixed Price Offering
The issue price that certain businesses set for the first sale of their shares is known as a fixed-price initial public offering (IPO). The price of the stocks that the corporation chooses to make public is disclosed to investors.
After the matter is resolved, the market’s demand for the stocks can be determined. Investors who participate in this IPO must make sure they pay the entire share price at the time of application.
2. Book Building Offering
In book building, the business launching the initial public offering (IPO) gives investors a 20% price range on the equities. Before the ultimate price is set, interested investors place bids on the shares. Investors must indicate here how many shares they plan to purchase and how much they are prepared to pay for each share.
The “floor price” denotes the minimum share price, while the “cap price” represents the maximum share price. Investors’ bids ultimately determine the price of the shares.
IPO Advantages and Disadvantages
Investing in initial public offerings has benefits and drawbacks. Before choosing to invest, you should be aware of the following advantages and disadvantages.
Benefits of Investing in an IPO
The following benefits are not available when investing in an IPO:
1. Enhanced Awareness
This positive aspect wins out when comparing the benefits and drawbacks of an IPO. By establishing the company as reliable, it helps managers build their credibility and reputation.
Generally speaking, publicly traded companies are more well-known than their private rivals. In the financial industry, a successful procedure also garners media attention.
2. Obtaining Capital
It gets more money than it raises through going public. This large amount of cash might significantly change a company’s growth direction. After its IPO, an ambitious company can start a new phase of financial stability.
This choice can, among other things, support R&D, facility construction, hiring new staff, debt repayment, capital expenditure financing, and the acquisition of new technology.
3. Opportunity for Diversification
A corporation’s shares are exchanged among investors on an exchange after it goes public. Because no one investor controls a majority of the company’s outstanding stock, investor diversity is increased. Consequently, investing in stock in a publicly traded company might aid with portfolio diversification.
4. Third-Party Viewpoint
When a company goes public, its business model, marketing plan, and other elements that can prevent it from turning a profit are all viewed objectively.
Disadvantages of Investing in IPO
Before beginning to invest in an IPO, an investor would need to consider a few factors:
1. Additional Expenses
IPOs can be very expensive. In addition to the ongoing expenses of regulatory compliance for publicly traded companies, the IPO transaction process requires financial investment in advertising, an investment bank, and an underwriter to ensure smooth operation.
2. Reduced Independence
The board of directors, not the CEO or president, oversees public corporations and answers directly to shareholders. The board still has the last word and the power to dismiss CEOs, including the company’s founders, even if it has given management a team to supervise daily operations. Some companies get around this by going public in a way that gives its founder veto authority.
3. Increased Stress
Publicly traded companies are under tremendous pressure to maintain high stock prices during market turbulence. If the stock price drops, executives might be unable to make risky choices. This sometimes sacrifices long-term planning for instant satisfaction.
Terms Related to Initial Public Offerings
Understanding some of the fundamental terminologies used in the process is essential to have an informed understanding of initial public offerings (IPOs). The table below lists a few of the frequently used terms:
- Issuer: A company or firm that wants to issue shares in the secondary market to fund its operations can be considered an issuer.
- Underwriter: A banker, financial institution, merchant banker, or broker can all be considered an underwriter. An underwriter helps a business underwrite its stock. Additionally, the underwriters pledge to purchase the remaining shares in the event that investors choose not to buy the equities offered at the IPO.
- Fixed Price IPO: The issue price that certain businesses set for the first selling of their shares is known as a fixed price initial public offering (IPO).
- Price Band: A price band is a way of determining value in which a seller sets a range of prices within which prospective buyers can submit their bids. The price band’s range guides buyers.
- Draft Red Herring Prospectus: Following SEBI’s clearance, the DRHP is the document that notifies the public of the company’s IPO listings.
- Under Subscription: When fewer stocks are applied for than the amount of shares made available to the public, a subscription occurs.
- Oversubscription: When fewer shares are offered to the public than are applied for, this is known as oversubscription.
- Green Shoe Option: It alludes to an opportunity for over-allotment, a type of underwriting agreement that allows the underwriter to sell more shares than the firm had originally intended. It occurs when there is more demand for a share than anticipated.
- Building Books: Book building is the process by which an underwriter or merchant banker attempts to ascertain the price at which the initial public offering (IPO) will be made. The underwriter creates a book in which he submits the bids from fund managers and institutional investors regarding the quantity of shares and the price they are prepared to pay.
- Flipping: Flipping is the practice of reselling an IPO stock during the first few days for a rapid profit.
Any adult who is eligible to sign a legal contract can meet the requirements to apply for a company’s initial public offering (IPO). Nonetheless, there are a few more unavoidable standards that an investor must adhere to.
Eligibility
The requirements for eligibility are:
Investors who wish to purchase shares in an initial public offering (IPO) must possess a PAN card issued by the nation’s income tax department. Additionally, a current demat account is required.
Having a trading account is not necessary; a Demat account can be used instead. An investor will want a trading account, nevertheless, if he decides to sell the stocks on listings.
When an investor wants to invest in an initial public offering (IPO) for the first time, it is sometimes recommended that they register a trading account in addition to their Demat account.
Conclusion
Investing in initial public offerings (IPOs) can be a lucrative opportunity with thorough investigation and expertise. IPOs allow Indian investors to join in the growth stories of rising enterprises and existing organizations looking to reach new heights. However, as with any investment, proper diligence and understanding of the related risks are critical. You can navigate the IPO market with confidence by remaining informed and evaluating each offering on its own merits. Whether you’re a seasoned market participant or a beginner, IPOs provide an opportunity to explore the potential for wealth creation in India’s expanding financial ecosystem.
FAQs
1. What is IPO meaning?
The sale of a private company’s first stock to the general public is known as an initial public offering (IPO). An IPO essentially signifies the transition of a company’s ownership from private to public, so the procedure is frequently referred to as “becoming public.”
2. What is IPO process?
The process by which a private business goes public by selling its stock on a stock exchange is known as an initial public offering (IPO). To offer their shares to the public market, private companies work with investment banks, which calls for rigorous marketing, regulatory compliance, and due diligence.
3. Are initial public offerings (IPOs) profitable?
Because they offer huge gains at a significantly lower risk than other options, they are a great method to invest your money. You can purchase comparatively small stocks and greatly increase your income if the business performs well.
4. Is it wise to invest in an IPO?
It may be wise to invest in an initial public offering (IPO). If you invest early, you may profit later as the price of a company with significant upside potential rises.
5. How can IPO shares be sold?
You can sell IPO shares during the pre-market period if you wish to do so on the day of listing. Following your listing, you will need to specify a number of factors, including the price at which you wish to sell your share, among other things, should you decide to sell.
