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What is an IPO and how to invest in an IPO in India?

What is an IPO and how to invest in an IPO in India?


Category : IPO

Are you aware of the term IPO? IPO (Initial Public Offering) is gaining tremendous popularity as an earning source for both company owners as well as shareholders. IPO is a procedure where a privately held company sells out its share to the public and makes it a public-traded company. This way, the concerned company shares ownership with the public by engaging a number of shareholders. Also, the company responsible gets listed on the stock market.

IPO is beneficial for both parties [the parent company as well as the investors]. On one hand, if you invest in an IPO, you can initiate trade efficiently with complete convenience by using your Demat and trading account. On the other hand, the company can raise capital by selling out shares to the public. It also increases the company's reputation, transparency, and credibility as it becomes a publicly-owned business organization.

Two types of IPOs

Two primary types of IPO are offered by companies. Before buying, you must know what these are to decide which one you wish to purchase.

1. Fixed-price- It is the simplest way of offering an IPO to the public where the company declares a fixed price for the initial public offering. If you agree with the deal, you would need to pay the price decided by the listed firm.

2. Book building- In this procedure, investors would place their bids after the stock price is proposed within a 20 per cent band. A floor price is the lower level of the price band while the upper level of the price band is called cap price.

Investors place bids for the shares they want to buy. This helps the company to know the interest of the public for the company before declaring the price of the upcoming IPO and then the firm decides a suitable price for the shares.

The procedure of IPO

How exactly does a company offer IPO to the public? The process is not complicated but requires following certain standards. Here, the company takes assistance from an investment bank that would handle the IPO watch. Now is the time to work on the financial procedures and prepare the underwriting agreement.

The next task is to apply for the registration statement with the SEC. SEC verifies the papers and studies the documents. After the SEC finds the papers to be genuine and right, it gives permission to declare the IPO.

Why do companies sell shares?

Before you invest in an IPO, you must know why exactly companies offer IPO to the public and what benefits they enjoy.

● The primary intention of offering an IPO is to raise money. By selling out shares, companies can earn a lot that can be utilized to pay loans, grow the business, and for other development activities for the company.

● Selling IPO is to get involved in an open market and to increase flexibility. It attracts more fresh talents towards the company as many employee stock ownership deals open up.

● When a private company sells out shares, it gains more credibility and reputation as it gives ownership to the public. This promotes transparency and shows the company is authentic and successful.

● As it becomes a public-owned company, it gets permission to issue more stocks. This also offers the opportunity for mergers and acquisitions.

What benefits are enjoyed by the share buyers?

Why does the public buy shares? A range of benefits is enjoyed by the public who purchase shares. Let us see why investing in an upcoming IPO can be a great idea.

● If you invest in an IPO, you can enjoy long-term benefits. If you invest in a promising company at an early stage, you can have the opportunity to own stakes in the shortest time possible. Now when the company would grow and become a trusted one, you can also enjoy the benefits.

● As mentioned before, investing in an IPO would offer long-term advantages. As you become a part of the company, you can also enjoy the benefits and profits gained by the company as an investor.

● IPO watch is a transparent and flexible procedure. A single price is offered to all the public investors and thus the procedure has nothing unfair. Therefore, it is a pretty reasonable platform to invest in.

How to invest in IPOs?

The procedure is pretty simple once you have decided on the company to invest in. The first step is to open demat account. The trading account facilitates the trading of shares while the trading account would electronically save and hold the shares that you have bought.

Also, you would need to have the fund ready and then search for a suitable company. You can easily apply from online portals for an IPO. You can do it through an investor portal of the broker's website or by downloading an ASBA form from your bank's net-banking portal.

You must know that payment in cheques or demand drafts is not allowed in buying stocks no matter which procedure you use.

What to consider before investing in an IPO?

The investment procedure is pretty simple and seamless. But why in the first place would you invest in an IPO? This is a perplexing topic but if you stay careful and aware, you can earn benefits by investing in IPO.

Let us see the factors that you should consider before investing.

● Know the background of the company. Make sure to study the IPO details provided by the company to know the information about the fund management team and its plans with the collected money.

● Make sure that a reputed investment bank has done the underwriting. This makes sure that the company is authentic as reliable investment banks don't permit low-performed or unstable companies.

● As you become a part of the company, you will be affected by the success or loss of the company. Take that into consideration.

● Make sure that the company is not in debt. Confirm that the company isn't selling shares to repay the debts. Avoid investing in such companies.

● Consider the risk factors and consult an expert before deciding.

Undoubtedly, investing in an IPO is an excellent earning opportunity if you are an expert in it. But make sure to consider verifying the company and study the risk factors before stepping into the market.

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