‘When an unlisted private owned company lists its shares on stock exchange, making shares available for the purchase by the general public it is called IPO (Initial Public Offering)’.
Public share issuance allows a company to raise their capital from the public investors. The launch of an IPO is interesting from an investor’s perspective as it gives them a chance to buy shares of the company for the first time.
To hold an initial public offering (IPO) Companies must meet the requirements by exchanges and the Securities and Exchange Commission (SEC).
IPOs provide companies with a chance to get capital by offering shares through the primary market. Companies recruit investment banks to market, set the IPO price and date, gauge demand and more.
Types of IPO –
- Book Building offering – In the book building the price band is offered by the issuer. The highest share price is called the cap price and the lowest share price is called the floor price. Investors can bid on this price band.
- Fixed Price offering – Fixed price IPO can be mentioned as the issue price that some companies set for the initial sale of their shares.
An IPO investment –
Investors bet on an IPO and they can earn handsome returns if they are wise and have some expertise. Through the prospectus of the companies initiating IPO the investors can form a choice.
If they want to raise stocks in the market they need to go through the IPO prospectus carefully to form an informed idea about the company’s business plan.
How to invest in an IPO(Initial Public Offering)
- Make a decision – The first step is to decide which IPO you want to invest in. You can make a rational decision by analize by red herring prospectus of the company that is offering the IPO.
- Arrangement of funding – Second step in the process is to arrange funds for the IPO. The investors can utilize their savings to subscribe to a company’s IPO.
- Apply for IPO –
You need to have a Demat account to apply for an IPO.
- Process of Bidding – IPO application made through the bidding process. A price range is pre – planned and investors have to put the bid in the price range. Funds are blocked while bidding.
- Demat account – Demat account is very important while applying for an IPO online. Demat account holds financial securities and shares electronically.
- Allotment of share – The last step is allotment. If the demand of the share is more than the number of shares offered, then one may receive less number of shares than they applied for.
The amount for which share is allotted is debited from the blocked amount and the remaining blocked amount will be released.
Who can invest in IPO –
If you want to invest in an IPO then you should know about eligibility that requires it.
- You should have a Demat account. Because when you apply for an IPO the details of the Demat account have been submitted.
- You should have an authorized PAN card.
- You should also need a trading account if you want to sell the shares before allotment.
Advantage of investment in an IPO –
- If you received your allotment and the IPO list is at its higher premium then its price band and you can easily make profit immediately by selling the shares.
So, if you are thinking of turning your savings into investments, then investment in an IPO is a great choice. Keep watching for the upcoming IPOs and make sure to read the fundamentals of the company before investing.