LEARN WHAT IS IPO AND IT'S CONCEPT

Indian stock market has become one of the major investment avenues. In fact, more and more people are putting their savings in the equity market or mutual funds. The potential of returns that stock market can make is very high. This makes it the most attractive place to put the money. However, in recent years IPO market has been getting high interest from the investors. The investors are ready to put money in IPOs because the return generation in newly listed companies is very high. In addition, most of the recent listings have been outperforming. Therefore, in this article, we shall learn about What is IPO and its concept.

Meaning of Initial Public Offer (IPO)

Initial Public Offer means a private company deciding to become a public company by raising investment capital from the market. A private company goes public when it sells off its shares in the general public. In addition, any private company may go public.

Let us now learn how to invest in the IPO.

How to Invest in IPO?

There are two ways of investing in an IPO -

The first mode of applying is manually by filling the form with the broker. In fact, this is the traditional method and the applicant receives the shares in his demat account.

The second mode of applying for an IPO is online. In fact, banks provide the facility to apply for an application through ASBA facility. The procedure to apply through bank online procedure is as follows:

1. Login to your banking portal which is ASBA enabled.

2. Visit the “Investment Section” on the page and select the e- IPO section.

3. Select “Invest in IPO” and fill the application registration form. Add the DP details on the profile page.

4. Complete the verification process and select the bank account number.

5. Bank portal will take you to “Invest in IPO” screen.

6. Select the IPO and fill the form.

7. Fill the number of shares, bid price and click on “Apply Now”

Most of the banks follow the above procedure to apply for an Initial Public Offer. However, there may be little difference in the process depending on the bank. 

Factors to Consider Before Applying for an IPO

There is a flurry of new IPOs in the market. In fact, more and more companies are going public. Therefore, it becomes very important to select the right company for investment. Below are the few factors that an investor must consider before applying for an Initial Public Offer.

• Company Background

Before investing in an IPO, the investor must check its background. In fact, the investor must know about the functioning, nature and operations of the business. In addition, evaluation of financial statements and management decisions over past years must be considered before investing.

• Future Expectations

IPO is about investing in the current business with the expectation of better future performance. Therefore, it is important to understand the future outlook of a company before investing. In fact, aspects like expansions plans, product launches, debt clearance, etc. must be considered.

• Current Valuation

Before investing in an IPO of a company the valuations at which Initial Public Offer is brought requires evaluation. In fact, if the current valuation of the company exceeds the already existing companies on the stock exchange, investment should not be done and vice versa. To put it another way, the price to earnings ratio must be calculated before investing in Initial Public Offer.

• Read Prospectus

The prospectus is a document that consists of all the details of the company. Therefore, before investing in the IPO one must try to read the necessary information available in the document.

Types of IPO

Fixed price and book building are the two types of IPO. The difference between the two IPOs is quite simple to understand.

1. Fixed Price Issue :

The company offers its shares at a fixed price. The investors know the share price before the firm offers shares for public. The demand from the market for the shares is out only when the issue closes. An investor has to pay the full price of the share while applying for IPO. The price per issue is set after a systematic evaluation of the company’s financial aspects. The price shows up in the printed order document which elaborates the price in light of various factors. This one is first Types of IPO.

2. Book Building Issue :

Through book building issue, the company offers only a 20% price on shares to the investors. Investors bid before the settlement of the final price. Investors declare how many shares they are buying and what amount they are ready to give out. There is no definite price. Instead, there are lowest and the highest share prices. Depending upon the bids of the investors, the final price is fixed when the bidding process closes.

Wrapping up

The number of fixed price issues is more than the book building issues. But the capital gathered from the book building issues are much more than the fixed price issues after the market price corrections. Book building issue is making a place for itself in the Indian Stock Market. It is most widely used in case of mega issues.

About Us

We are providing stock market education. We help the beginners and old investors to learn the technical charts of the stocks. In fact, by understanding the technical charts they can become successful intraday traders. In addition, the investors and traders get to understand the factors they must consider before applying in an IPO.