What is an IPO? How to invest in an IPO

IPO

Introduction

Stock markets are a place where you can invest in many different businesses and services through an online platform conveniently and grow your wealth. But, it can get tricky for many to support here, especially since there are thousands of stocks listed on the Indian stock exchanges. But how do these stocks start their trading life? How do they get listed on exchanges? The answer is IPO. This article will cover all the basics of an IPO and how you can invest in it.

What is an IPO, and how does it work?

An IPO is an abbreviation for Initial Public Offering. It means the first time the shares of a company are offered by it to the public for investment. Before an IPO launches, the company is a private entity, and its stakeholders are the company’s founders. Private group/s of investors who provided funds to start and grow the company and existing employees of the company may also be its stakeholders. But once it gets launched, the company goes public and becomes a listed company on the stock exchanges such as BSE, NSE, etc. It receives a rank among these stock-listed companies based on its market capitalization. It is then open to the general public for buying partial or total stake through shares. Simply put, an IPO is a route through which a private organization becomes a public limited company.

Through an IPO, a company raises funds for its overall growth. Some companies look at clearing their debts with the IPO funds, while some pump in the funds for working capital requirements, corporate purposes, etc. It is hard to assess the market worth of a private company. Hence, companies launch an IPO with the support of an investment bank. The investment bank help in calculating the valuation of the company after considering multiple factors like assets, liabilities, income, revenue, sales, debt, earning potential, clientele, etc. The price band of the share, the number of shares that should be issued, the date of launching the IPO, and many other crucial IPO aspects are decided with the help of the investment bank. Once the company is public you can easily calculate its market capitalization. The market capitalization of any listed company is the number of shares in the market multiplied by the price of each share.

A business or service private company that wants to launch its own IPO has to follow an application process that has been laid down by SEBI. The said company gets approval for the IPO only after it has met the required criteria for listing.

Tips to invest in an IPO

IPOs are a great platform to invest in a company. However, contrary to popular opinion, every IPO may not be a hit for its investors. Some may dunk immediately after listing or sometime in the long run. Here are some tips to make your IPO investments profitable,

  • Study everything there is to know about the company before you make the investment decision – its business line and sector, its balance sheets and other reports, how and where it will use the funds raised through the IPO, etc.
  • Market trends have an impact on the IPO’s performance. Hence, try to go for IPO investments when markets are performing well.
  • Keep track of the volume of the applications that the IPO is receiving daily to get a fair idea of the success of that IPO.

Investing in an IPO

Once an IPO launches, you can apply for it through your Demat Account. Remember, you cannot apply for one or two shares in an IPO. There is a minimum lot size that you have to invest in for a successful IPO application. You can apply for multiples of that defined lot size. An IPO can be oversubscribed or under-subscribed based on how popular it is among investors. An under-subscribed IPO means your subscription will be allotted shares, while in an oversubscribed IPO, the chances of share allotment to you are on probability.If you want greater exposure in IPOs you can also consider investing in a Mutual Fund that focuses on IPOs exclusively. Once the shares of an IPO are allotted through the application, you can start trading them in the open market.

A Demat Account is a prerequisite for investing in an IPO. If you don’t have a Demat Account, you can apply for one easily online. However, as per the terms of SEBI, you can open a Demat Account only with a registered broker. You can opt for a full-service registered broker as they offer excellent valued-based services that can immensely benefit any newbie investor. Their additional services include investment advisory, consultancy, research, stock recommendations, investment assistance, etc. ICICI Direct will regularly update you about all the upcoming and ongoing IPOs along with other investment options. Check out the current set of IPOs on ICICI Direct’s webpage by clicking here.

Conclusion

IPOs are known to offer great returns. But, it is vital to invest in IPOsonly with surplus funds and not borrowings, as anIPO is eventually an equity stock. And it comes with a zero performance guarantee. Hence, do not get overwhelmed by your past IPO success and invest smartly.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990.Please note, IPO and Research related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.