Initial Public Offering (IPO) is a common term in the Stock Market that every investor should understand. Nowadays, many people want to invest in IPOs, but not everyone has complete information about them. Below, we explain the IPO Meaning, Types, Process & Benefits in detail.
What is IPO?
An IPO (Initial Public Offering) means that a Company asks the public for money to grow its business. In return, the company offers a small portion of its ownership (shares). This makes the Company publicly traded and anyone can buy its shares on the Stock Exchange.
Types of IPO
There are mainly two types of IPOs, which we can understand as follows:
1. Fixed Price IPO
In this method, the company pre-determines a fixed price for the Shares. Investors know the price and have to apply at that price, regardless of whether the demand is low or high. This method is straightforward and involves less risk.
For example – Share price is ₹200, so you apply at ₹200 only.
2. Book Building IPO
In this process, the company sets a price band (minimum to maximum price). Investors place bids within this price band, and the final price is determined based on demand.
For example – Share Price band is ₹80-₹90, so you can bid between ₹80-₹90.
IPO Process
The IPO process proceeds in a step-by-step manner, in which the Company is prepared to sell its shares publicly. We can understand this easily as follows:
1. Company plans to launch an IPO
The Company plans to launch an IPO to raise capital to grow its business.
2. Appointment of Bankers
The Company first appoints bankers who plan and conduct the valuation.
3. SEBI Approval
The Company files a Draft Red Herring Prospectus (DRHP) with SEBI, which contains all the Company’s information. SEBI reviews all the company’s details and then grants approval.
4. Price is decided
The Company decides the share price or price range.
5. IPO opens
The IPO is open to the public for a few days (normally 3-5 days) during which you can apply through Banks or Trading Apps.
6. Share Allotment
Shares are allotted based on demand. If too many people apply, not everyone will be able to get shares.
7. Refund (If Needed)
Investors who do not receive shares have their money returned to them.
8. Listing
The Company’s shares are listed on the Stock Market after 3 days and after that, the shares can be bought and sold.
Benefits/Advantages of Investing in IPO
Investing in an IPO is a great opportunity for both new and experienced investors. Some of its main advantages are as follows:
- Invest Early – An IPO gives you the opportunity to invest in a company at its early stages, before it becomes popular in the Stock market.
- Possible Listing Gain – The share price may increase on the first day of Listing, allowing you to make a profit quickly.
- Transparent Information – Before an IPO, Companies are required to share details and risks of their business, which helps investors, make informed decisions before investing.
- Good For Long-Term – A good Company can grow over time, which will also increase the value of your investment.
- Start with Small Investment – Retail investors can apply even with small amounts; you don’t need to have a large amount of money.
- Easy to Sell – Once listed, you can easily sell whenever you want.
Disadvantages of Investing in IPO
IPO’s are not always profitable, they also involve certain risks. Investors should understand these disadvantages before investing their money. Below are some important disadvantages of investing in an IPO:
- Profits are not Guaranteed – Not every IPO is profitable, sometimes the share price falls after listing.
- Allotment not Guaranteed – Due to high demand these days, the chances of getting an allotment of shares are very low.
- Limited Company History – New Companies have limited historical data, so their true performance becomes apparent only later.
- High Risk – Investing in an IPO is risky if the Company is new or the market is experiencing a downturn.
- Overhyped IPO – Some IPO’s are heavily advertised or we think they are good because of the high subscription rate, but later we don’t get any profit.
Key Terms in IPO
- Issue Price – The price you pay for one share in the IPO.
- Price Band – The minimum and maximum price range of the share (e.g., ₹80-₹90).
- Bid – At what price are you willing to buy the shares?
- Lot Size – The minimum number of shares you need to apply.
- Cut-Off Price – The final price will be decided after the bidding process.
- Subscription – This shows how many times an IPO is applied by investors.
- Allotment – The process of giving shares to investors after the IPO closes.
- Listing Date – The date when IPO shares list and start trading on the stock exchange.
- Listing Gain/Loss – The profit or loss that occurs after the shares are listed on the Stock Market and trading begins.
- Underwriter – Banks or institutions that manage and support the IPO process.
- Offer for Sale (OFS) – The Company’s existing owners sell their shares.
- SME – These IPO’s are for Small and Medium-Sized Companies and need high Investment.
- GMP (Grey Market Premium) – The Grey Market Premium (GMP) before listing indicates the unofficial price of IPO shares, which helps estimate the potential listing gains.
- Draft Red Herring Prospectus (DRHP/RHP) – This is a document submitted to SEBI before an IPO that contains all the information about the Company.
- ASBA (Application supported by Blocked Amount) – A method of receiving payments via UPI where the application amount remains blocked in your account until the application is received.
- Retail Category – Portions reserved for small investors (Less than 2 Lac, Normally 35% shares).
- QIB Category – Portions reserved for Big Qualified Institutional Investors (Normally 50% shares).
- HNI Category – Portions reserved for Big Investors (Greater than 2 Lac, Normally 15% shares).