What Is IPO And How to Invest in It?

By Sthitaprajnya Panigrahi Thursday, 22 April 2021

Initial Public Offering is a process in which a privately held company turn into a publicly-traded company by making its share accessible to the public for the first time. A private company already having a handful of shareholders shares its ownership with the common people by going public and trading its shares. Via the IPO, the company gets to list its name on the stock exchange.

Types of IPOs:

1. Fixed Price IPO

Fixed Price IPO is also termed as the issue price that some companies set for the initial sale of their shares and the investors come to know about it when the company decides to make it public. Once the issue is closed, the demand for the stocks in the market surfaces. If the investors desires to partake in the IPO, they must ascertain to pay the full price of the shares while making the application.

2. Book Building Offering

In book building offering, the company initiates an IPO offering at 20% price band on the stocks to the investors where the concerned investors bid on the shares before the final price is decided. In this case, the investors need to highlight the number of shares they desire to buy and the total amount they are willing to pay per share. Here, the lowest share price is known as floor price and the highest stock price is referred to as cap price. The final decision concerning the price of the shares is decided by investors’ bids.

Some steps are mentioned below that the investor needs to follow to ensure that they are actually on the right path to wealth. For investing in IPO, the steps an investor needs to follow includes:

1. Decision Making

The most preliminary step for an investor would be to choose the IPO he intends to apply for. Although it might be an easy task for the industry experts, it might be a tiring job for first timers. By going through the prospectus of the companies offering IPO to know about the company’s business plan and purpose for raising stocks in the market, the investors can make their decision.

2. Funding

This is the next step, when an investor takes the final decision regarding the IPO, he would like to invest in. To arrange the funds, an investor can use his savings to buy a company’s share or else can avail a loan from specific banks and Non-Banking Financial Organisations (NBFCs) at a particular ROI.

3. Opening a Demat-cum-trading account

Without a Demat account, an investor is not eligible to apply for an IPO, as the purpose of a Demat account is to offer the investors with the provision to stock shares and other financial securities electronically. To open a Demat account, the investor needs to submit his Aadhaar card, PAN card, address and identity proofs.

4. The application processes

After the formation of demat-cum-trading account, the investor needs to be familiar himself/herself with the Application Supported by Blocked Account (ASBA) facility. For every IPO applicant it is an important step, as ASBA application enables the banks to arrest funds in the applicant’s bank account.

5. Bidding

It is necessary for the investor to bid while applying for the shares in an IPO and this is done according to the lot size quoted in the company’s prospectus. The minimum number of shares that an investor has to apply for in an IPO, is termed as lot size. After a price range is obvious, the investors need to bid within the price range and block the required funds while bidding. Meanwhile, the arrested amount in the banks raises interest for the investor until the process of allotment is started.

6. Allotment

Few times the demand for the shares can rise above the actual number of stocks released in the secondary market and in this situation the investor often gets a fewer number of shares than what he had demanded. In such case, the banks expose the arrested funds either entirely or partially. To get a full allotment, the investor would receive a CAN (Confirmatory Allotment Note) within six working days after the IPO process is completed. Soon after the shares have been allotted, they are accredited to the investor’s demat account.

Once the above-mentioned steps are completed successfully, the investor needs to wait for the listings of the stocks in the share market, which is generally done within seven days after the shares are finalised.

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