Many people want to invest in an IPO and due to a lack of knowledge, many of them end up not investing. Moreover, you must have seen an announcement by a company for IPO offerings on television channels and newspapers. If you are among the people who wonder What is IPO (Initial Public Offering)? and How does a company offer IPO? Here is the guide which will clear all your doubts related to Initial Public Offering (IPO). 

Definition Of IPO

The full form of IPO is Initial Public Offering. Whenever a privately held company lists its shares on the stock market for the first time to become a public company, this process is called Initial Public Offering. The company sells a portion of its stake to the investors to infuse new equity capital to the firm that can help in monetizing the investment made by the existing stakeholders or maintaining capital for the future.

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Types of IPO

Mainly there are two types of Initial Public Offering:

1. Fixed Price Offering

In Fixed Price Offering, some companies initially set an issue price for the sale of their shares by evaluating the assets, liabilities, and every financial aspect of the company. Wherever the stock is made public the investors come to know about the price of the stocks decided by the company. The demand for stocks is only known once the issue is closed. When making the application in this IPO the investors must ensure that they pay the full price of the share. 

2. Book Building Offering

In Book Building Offering, the company initiating an IPO offers the investors a 20% price band on the stocks. Before the final price of the shares is decided the investors bid on the shares. While bidding, the investor needs to specify the number of shares they intend to buy and the amount they are willing to pay per share. Depending on the bids, the price of the shares is decided. The demand for the share is known everyday.

Eligibility to Invest in an IPO

To apply in the Initial Public Offering of a company, the individual must be an adult and should be capable of entering into a legal contract.  However, an investor has to meet some other important norms. The eligibility norms are:

• It is important for the investor interested in buying IPO shares to have a PAN card issued by the Income Tax department of the country in which the investment is to be made.
• The investor must have a valid Demat Account.
• Demat Account serves the purpose of the investor to invest in stocks in the stock market. It is not important to have a trading account as it will be required only if the investor sells the stocks on the listings.

When investing in the IPO for the first time, it is advised to open a trading account along with a Demat account.

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How to Invest in IPO

There are certain steps an investor need to follow while making an investment in IPO:

1. Decision

This is the initial step in which the investor needs to decide the IPO he/she wants to apply for. It may be difficult for the new investors, whereas the existing ones may have the expertise. However, going through the prospectus of the company initiating an IPO can help the investors to form a choice.

The company’s prospectus helps the investors to have an idea about the plans of the company and its purpose of raising stocks in the market. The investor needs to look forward to the next step once the decision has been made.

2. Funding

Once the decision is made by the investor regarding the Initial Public Offering he would like to invest in, the next step includes arranging of funds. Investors can use their savings to buy shares of a company. 

However, if an investor does not have enough savings, he/she can avail of a loan from certain banks at a definite rate of interest.

3. Opening Demat and Trading Account

Without a Demat account, no one can apply for an IPO. The Demat account helps the investor to store shares and other financial securities electronically. Moreover, a Demat account can be easily opened by submitting an Aadhaar card, Pan card, address, and identity proofs to any financial organization in which the investor wants to open a Demat account.

4. Application

Application for an IPO can be done through a Demat account or trading account. Some financial organizations also provide an option to merge your Demat, trading, and bank accounts. It is mandatory for all the IPO applicants to be familiar with the Application Supported by Blocked Account (ASBA) facility. It enables the banks to fix funds in the applicant’s bank account.

5. Bidding

While applying for the shares in an IPO an Investor needs to bid. This is done according to the lot size mentioned in the company’s prospectus. The lot size refers to the minimum number of shares that an investor has to apply for in an IPO. The investor has to bid within the price range decided before. 

6. Allotment

There can be cases in which the demand for shares can exceed the actual number of stocks. There can be situations in which investors can get fewer shares than he/she had demanded. 

If an investor gets a full allotment, he receives a CAN (Confirmatory Allotment Note) within six working days after applying for the IPO. Once the shares are allotted, the investors’ Demat account is credited with the shares. After this, the investor has to wait for the listing of stocks in the stock market.

Read: Merger and Acquisition – Definition, Types, Advantages, Differences

Terms Related to IPO

• Underwriting

The process of issuing new stocks and raising investments is known as the underwriting process. However, this process is performed by the underwriter, it can be a banker, a financial institute, a merchant banker, or a broker. An IPO with a success potential is usually backed by big underwriters that have the ability to uplift a new issue.

• Lock-up Period

Generally, after the IPO goes public, a deep downtrend is faced by the IPO. The main reason behind this downtrend of the share price could be a lock-up period. Additionally, the lock-up period refers to a contractual caveat period of time the company’s investors and executives are not supposed to sell their shares. 

• Flipping

When people buy stocks of the company going public and sell off their secondary market stocks in the view to make money in the short term. These people are called flippers and the process is known as Flipping.

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