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IPO launches appear to attract investors from all walks of life. When people hear about Initial Public Offerings, their curiosity directs them to invest in the IPO. An IPO is not just another buzzword for traders; it proves a good investment in some cases. Everyone agrees that the IPO meaning can be explained simply as the opportunity to obtain shares at a lower price prior to the subsequent shares being listed on the stock market.
An investment in the stock market is not everyone’s cup of tea, especially for people who are not from a financial background. The transition from a private company to a public company is an essential phase of a company’s progress. You can apply for an IPO from the new-age platform Share India.
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Table of Contents
What Is an IPO?
An IPO is a process where a private company lists its shares on the stock exchange and offers them to the public. You can also say that a private company goes public. Companies go public for a major reason, which is to raise funds from retail and institutional investors. Before the IPO, a private company has a bunch of investors and venture capitalists. But after the successful launch of the company IPO, the company opens up its shares, which you can buy directly from the company on the stock exchange. If you have opened a demat account, you can keep these shares and sell them whenever you want.
In the IPO, after a company decides to go public, there is a lead underwriter to help with the price listing and filing process. The distribution of shares to the public is handled by the underwriter, which can be a group of investment banks or brokers. From date to listing price, all processes are documented by the underwriter for the IPO.
There is one more thing that is vital to know. The other types of new equity issues offered by companies are:
1. Follow-on Offering
An issuance of additional shares of stock by a company that is already publicly traded. A follow-on offering has a dilutive effect on an individual’s position as companies issue new shares.
2. Secondary Offering
A secondary offering refers to the sale of a substantial quantity of shares in a publicly traded company, wherein these shares are transferred from one investor to another within the secondary market. These secondary offerings have no dilutive effect on customer positions, but they do make a difference in the share price of the company.
Participating in an IPO
When you want to invest in an IPO, you must study and evaluate the risk and reward ratio of a particular company’s stock. So, if you agree to purchase shares of the stock at the offering price, then consider participating in the IPO.
Before you invest in an IPO, you first need to determine the brokerage firm and apply for the upcoming IPO. The eligibility of the requirement typically depends upon the lot size of an equity. You must also know that IPO investing is not so simple. There is a possibility that you may not get allotted shares in your stock market. There are times when all the shares are allotted, and the scarcity of IPO lots increases the demand for a particular share. Many investors invest in an IPO in order to make a long-term investment or a short-term investment. So, when you have researched the company and have been allocated shares in the IPO, it is important to know that you are free to sell the shares that you have obtained in the IPO. The practice of quickly selling IPO shares is known as flipping.
How Are Shares Allocated in an IPO?
The allocation of shares during the IPO is done with regard to the categories of investors. These include Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Individual Investors (RIIs). The allocated shares are divided into these groups after the closing date. A retail investor comes in the last category of the allotment list.
In most cases, the shares are distributed to retail investors through a lottery system. All this is done by a computer program, which ensures an impartial allocation of shares to the investors.
Why Do Companies Go Public?
A company goes public for a major reason, which is to get capital and expand its business. Every company, regardless of industry, needs to expand and grow without incurring excessive debt or paying high interest rates to private investors. As per the prerequisites set by the Securities and Exchange Board of India (SEBI), any company can go public to raise funds, awareness, and more.
Allowing company shares to go public may change the way the management thinks and the way the company works. It’s important for a company to know what it means to go public. A venture capitalist sells their stock in the company at the time of the IPO launch and exits from the company. Another reason for an IPO is the marketing and popularity it gains from the broker or financial news. People have long waited for certain IPOs to come live on the stock market.
Pros of IPO
Some of the pros of an IPO are as follows:
- With an IPO, additional funds without any interest rate can be achieved by the company.
- IPOs can give a company a lower cost of capital for both equity and debt.
- It attracts and retains better management and skilled employees through liquid stock equity participation.
- Increase the dependency and growth of the nation’s economy.
Cons of IPO
Some of the cons of an IPO are:
- A company needs to audit and do lots of paperwork.
- Lots of time and resources are required to file an IPO.
Conclusion
So, when a company wants to raise money, release itself from a debt trap, or expand its vision forever, it goes for an IPO, where you can carefully study the IPO and analyse the company’s financial statements and other ratios. When an IPO is announced, there are lots of opinions about it. It’s better not to take anyone’s advice. Rather than that, do your own research and make the decision whether to invest in that IPO or not.
The price of an IPO is set by the underwriters through their marketing process. In short, the IPO price is based on the valuation of the company using fundamental techniques, like discounted cash flow methods. Besides that, the value of the company’s assets and debt also influences the valuations. So, before making any decision, do your own due diligence. It requires effort, and with the advent of the Internet, all the resources can be handy for you.
You can also refer to the issuing document of a company, which is known as a ‘red herring prospectus’. This document provided by the underwriter includes information about the company’s management, team, target market, sector, and financials. It is important that each and every investor knows in which company or business they are investing.