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Overview of IPO
Imagine a company having a big sale, but instead of toys or clothes, they’re selling “pieces” of their company. These pieces are like special cards that say, “I’m a part-owner of this company!” This is called an IPO.
It’s like the company’s way of inviting everyone to be a co-owner and share in their success. For example, Company XYZ decided to do this. They let people buy these special cards and be part of their group. But remember, just like buying stuff has good and not-so-good parts, IPOs have risks and rewards. So, before you go ahead for an IPO, it’sbetter to learn the game! 
What is an IPO?
An Initial Public Offering (IPO) is a financial event where a privatelyheld company becomes publiclytraded. This happens when a company offers its ownership shares to the public for the first time. It’s a way for the company to raise funds from individuals interested in investing in its growth.
Initially supported by founders and early investors, a private company eventually aims for an IPO when it feels stable enough to adhere to regulations and utilize public funds for expansion. After the IPO, the company’s shares can be freely traded on the stock market. Stock exchanges often require a minimum portion of shares to be available for trading to maintain a balanced market.
Imagine you’re a big fan of a social media platform called “FriendConnect.” This platform started as a small company with only a handful of people using it. However, it quickly became popular due to its unique features and user-friendly interface.
The company behind FriendConnect, which was privately owned by its founders and a few early investors, began to realize that they needed more resources to keep up with the growing number of users and to introduce new features. So, the company decided to raise money to improve the platform, attract more users, and expand globally.
“Their strategy? Going public through an Initial Public Offering (IPO).“
This means they’re offering a part of the ownership of their company to the public, including regular people like you and seasoned investors. By purchasing shares in the company, you become a partial owner of FriendConnect. So, you decide to invest some money in the IPO, buying shares of the company.
Nevertheless, it’s essential to remember that investing in an IPO carries risks. While the platform’s popularity could drive up the value of your shares, challenges or unexpected developments could also lead to losses.
Understanding IPO: Primary & Secondary Market
In the Primary Market, a company’s entry into the stock world unfolds with an Initial Public Offering (IPO), selling fresh shares to investors. Here, investors directly contribute to the company’s growth by purchasing its shares, forming the company’s equity capital. Apart from IPOs, stocks can also be offered through private placement and preferential allotment.
1. Private Placement: Shares are offered to significant investors like banks without involving the general public.
2. Preferential Allotment: Shares are sold to chosen investors at prices not available in the market.
The Secondary Market, or Stock Exchange, takes center stage after the primary market. This is where shares, initially acquired in the primary market, are traded among investors. It’s a dynamic platform where shares are bought and sold based on market conditions.
Advantages of Investing in IPO
Imagine it like getting a front-row seat to a stock market show. Here’s your sneak peek into why investing in IPOs is a smart move:
- Start with Listing Gains: Picture this – the day an IPO joins the stock market party, if its share price is higher than what you paid, you’ve scored Listing Gains. It’s like buying a ticket and finding out it’s worth more when you get in!
- Liquidity Magic: Once a company goes public, you can sell its shares in the market anytime. Flexibility alert! You’re not stuck; you can jump in and out as the market moves.
- Small Investors, Big Chances: Rules are in place to ensure small investors like you get a shot at IPOs. Sometimes, it’s tough to get a fair chance to small investors in the secondary market/stock market.
- IPO Insights: Initial Public Offering (IPO)comes with a manual – the prospectus. It spills all the details about the company’s past, present, and future plans. You get the inside scoop to help you decide where to put your money.
- Transparency on Point: When you join an IPO and get shares, you’re part of the company. They work hard to meet goals and make profits, which affects the share price, which can go up or down based on how they’re doing. The IPO order document also tells you how much each share costs. So you have the same info as big investors.
- Smart Money Moves: Initial Public Offering (IPOs)often starts at a lower price, so you’re getting a deal right from the start. There is no need to chase rising prices later. It’s like catching a great sale before everyone else!
- Early Bird Advantage: You’re not just attending the party; you’re at the ‘ground floor’ of a company’s journey. Think of it like joining a startup that could shoot to success – quick gains, long-term growth.
- Achieving long-term goals: IPOs are like long-term puzzle pieces. They can help you build wealth for big dreams like retirement or buying a house.
Disadvantage of Investing in IPO
Let’s talk about the not-so-fun parts of IPO investing that you should be aware of, whether you’re a pro or just starting out:
- Risky Sell Game: Picture this, you buy shares during an IPO and hope to sell them fast after the company goes public, making a profit. But here’s the hitch – finding buyers might not be as simple as selling lemonade. Sometimes, there might not be enough interested buyers in the market, and that can leave you hanging.
- Info Shortage: When it comes to IPOs, information isn’t always your best buddy. Retail investors like you might not have easy access to all the detailed info you need to make a smart choice. Independent research and getting the full scoop on a company’s health can be tough. Even if you find the company’s prospectus, it might read like a puzzle only financial wizards can solve.
- No Guarantee of Winning: Believe it or not, even big players can stumble in the IPO game. Think of a company like L&T Infotech. Back in 2016, when they had their IPO, the market response was kind of “meh.” Just because a company is well-known doesn’t mean its IPO will be a hit. The listing gains you hope for aren’t guaranteed.
So, while IPOs can be exciting, they come with their own set of challenges. Just remember, it’s not all about the flashy lights – it’s about understanding the risks before diving in.
What are the Types of IPO?
There are two exciting ways companies can do this: the Fixed Price Offering, where it’s like ordering from a set menu, and the Book Building Offering, which is more like an auction. Let’s dive into these IPO flavors and see how they work!
1. Fixed Price Offering
Imagine it like picking a shirt with a price tag. In a Fixed-price IPO, the company decides on a set price for its shares before the party starts. Investors know exactly how much they’re paying per share.
During the IPO, investors apply for shares at this fixed price. Once the IPO ends, the company calculates how many people want to buy shares at that price.
If there’s more demand, it’s a good sign for the company. If there’s less demand, they might need to rethink things.
Investors who participate in this type of IPO must pay the full price for the shares when they apply.
2. Book Building Offering
In simple terms, this concept is about setting the price of company shares based on how much people want to buy them. Merchant banks help figure out how much each share should cost. When a company wants to raise money this way, they looks at offers from different investors, like foreign portfolio managers or big institutional investors. Sometimes, they bring in an underwriter to help.
The “book-building” process gets its name because the underwriter collects big investors’ offers. After everyone has made their offers, they use a special method to find the final price based on how much demand there is in the market. It’s like finding the average price that makes sense for everyone involved.
What are the Eligibility Criteria for an IPO Application?
There are some important things you need to check off before jumping into an IPO (Initial Public Offering) adventure. Let’s break it down into simple steps:
1. Securities and Exchange Board of India (SEBI), the stock market authority in India, has its own guest list. To be on it, you need to fit into one of these categories:
As of now, four types of investors can invest in an IPO
i) Qualified Institutional Buyer (QIB):If you’re a big investment firms, mutual funds, scheduled commercial banks, registered institutions with SEBI, you’re a Qualified Institutional Buyer (QIB).
ii) Non-Institutional Buyer (NII): If you’re a wealthier individual, a company, a High Net Worth Individual (HNI), or a corporate body and your subscription value is over Rs 2 lakhs, you’re a Non-Institutional Buyer (NII).
iii) Retail Individual Investor: That’s most of us! We’re Retail Individual Investors who apply for shares valued within 2 lakh rupees.
iv) Employees: If you work for the company going public, you’re an Employee.
2. Demat Account: You must have your Demat account for IPO investment. It’s like a storage spot for your allotted shares.
3. Trading Account: Before applying for any IPO online, you need a trading account. You can get one from a SEBI-certified depository participant.
4. PAN Card:You must have a Permanent Account Number (PAN) card.
5. UPI ID: You must connect your UPI ID to your bank. Create a new one, or use what you have.
6. Bank Account:You must have connecteda bank account with yourDemat account
7. Enough in Bank: Ensure your bank account has enough money to cover the IPO application. Although the money won’t be taken right away, it will stay locked until the allotment date. If you’re chosen for shares, the amount will move from your bank to the company.
And don’t stress; if you don’t get the IPO shares, the locked money will be set free. You’re free to use it however you like.
How to apply for an IPO?
“Before you dive in, it’s smart to do your homework.”
Imagine you are picking a team for a favorite game – you would want to know their playbook. The same goes for investing in an IPO. Get to know the company’s plans, how they’re doing financially, and what their future goals are.
But wait, there’s more! Just like you’d check the weather before going on an adventure, you’ve got to understand the risks too. Investing in an IPO isn’t all sunshine and rainbows, and it’s good to be prepared.
Imagine Trade Targetas your IPO adventure guide: We’ll show you the steps, translate the fancy words, and prepare you to dive into the world of IPOs. If the idea of applying for an IPO has you scratching your head, don’t sweat it.
IPO Application Methods
There are two ways to bid for IPOs. Let’s break it down so both newbies and seasoned investors can jump in with confidence.
1.How to apply for an IPO online?
It’s as simple as a few clicks. No more sweating over forms. In fact, a big chunk of your info automatically appears from your trading or demat account.
You’ve got not one but two ways to apply. You can either use Internet banking or head straight to your broker’s website.
- i) Applying for IPO Online via Internet Banking:
- Log in to your internet banking using your username and password.
- Find the ASBA tab and give it a click.
- Click ‘Apply IPO‘ and pick the company you’re interested in.
- Fill in your PAN, name, bid quantity, and price.
- Click on Submit.
Your bid will be accepted on the same day if you submit it before 2 PM on a working day. Otherwise, it will be accepted on the next working day.
- ii) Applying for IPO Online via Broker
- Open your broker’s website or app and log in to your account.
- Go to the IPO section and find the IPO you want to apply for.
- Choose how many stocks you want and the price you’re good with
- Enter your UPI ID, then click on”Submit” button.
- Open your UPI app and then approve your transaction.
- Wait for the mandate notification in your UPI app
2. How to apply for an IPO Offline?
In the offline world, it’s a bit like old-school treasure hunting. You fill out a physical form and hand it over to either the IPO banker or your trusty broker. It’s like delivering your request right to their doorstep.
Here’s what you need to do:
- Visit your bank branch or the broking firm’s office.
- Complete the ASBA application form and share your KYC details.
- Your funds will be temporarily blocked. Once shares are assigned, the amount will be deducted from your account.
IPO Timeline: From Bidding to Trading
Welcome to the IPO timeline, a roadmap that takes you from the moment you decide to bid for shares to the exhilarating point when those shares hit the stock market. It’s like a roller coaster of financial events, each with its own spotlight moment. Let’s break it down, step by step, so you’re ready to ride the IPO wave like a pro!
- Open/Close Date: Imagine this like a window of opportunity. The IPO process starts on the “open” date and ends on the “close” date. During this time, anyone who wants to buy shares can place their bids or applications.
- Allotment Date: After the bidding window closes, the company decides who gets how many shares.
- Refund Date: Remember that money you set aside to buy shares? Well, it’s like putting it in a vault for now. If you don’t get the shares, don’t worry! The company gives you your money back. The “refund date” is when they start sending back money to those who didn’t get shares.
- Credit to Demat Account Date: Picture this as a special delivery. If you’re one of the lucky ones who got shares, they’ll show up in your account. It’s like getting a package in your online stock locker. This happens before the shares officially hit the market.
- Listing Date: Time to party! This is when the company’s shares make their grand debut on the stock market. They’re now available for trading, like items on a store shelf. It’s like the company saying, “Hey, our shares are up for grabs!”
How to Check the IPO Allotment Status?
Here’s how you can quickly check whether you’ve been allotted shares in the IPO you’ve applied for.
Step 1: Go to the IPO registrar’s website (like: Link Intim/KFintech).
Step 2:Have these ready:
- Your PAN Card
- IPO Application Number
- Demat Account Number / DP Client ID
The IPO registrar sorts out who gets shares. Once they’re done, you can see if you got any shares under the IPO’s name you applied for. You will also notified through Email and SMS from BSE, NSE, CDSL, and NSDL.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
