What are IPOs and How Beginners can Invest in IPOs?
Invest in IPOs and experience the thrill of being involved in the growth of a company, right from its public debut. In fact, just imagining buying shares of a company right before it goes public could be a fantasy come true, especially when you have faith in the company. But, as far as IPOs are concerned, they seem complex and intimidating for beginners.
In this blog post, we will explain what an IPO is, how it works, and how beginners can invest in them in India. So, for someone just getting into investing, understanding the fundamentals of an IPO is a great way to bootstrap himself into the world of stock market investments.
What is an IPO?
An IPO, or Initial Public Offering, refers to the process under which a private firm offers its equities to the public for the first time. For the first time, the firm takes a decisive step from being a close concern-it is owned, either partly or wholly, by its founders, employees, or outside investors- landing into public trading on a stock exchange-private roped in by the company.
Hence, there are many reasons for becoming a public limited company. The most important one is to raise capital. Through a general public offer, a company can mobilize funds for expansion, servicing the debts, or venturing into different spheres of activities. Going public endows liquidity to the existing shareholders of the company- employees or venture capitalists-who might be willing to dispose of their shares.
Public offering is the way retail investors like you have a chance of owning a growing company right from the start.
How an IPO Works:
An initial public offering (IPO) is a strictly regulated process that involves many stages.
Preparation:
Meanwhile, the company has prepared a prospectus outlining the business model, financials, and future prospects to investors, alongside working with its investment banks-underwriters-on the company’s assessment of financial health, share price, and number of shares to issue.
Filing with SEBI:
In India, a company has to file a Draft Red Herring Prospectus (DRHP) in the Securities and Exchange Board of India (SEBI), the market regulator for securities of India. The document is reviewed to be accurate and compliant with the regulations. Once approved by SEBI, the IPO becomes launch-ready.
Price Band:
In consultation with its underwriters, the company creates a price band for the ipo. The final price of the shares will be determined within a particular range given by the price band. The investors would, therefore, place their bids for shares within that range.
Subscription:
The IPO is opened for subscription through which investors can place their bids to buy shares. Depending on demand, the IPO can be oversubscribed, which simply means several persons wish to buy a share, but it is not possible. In such cases, shares are prorated, so that each has only part of what he or she requested.
Listing on Stock Exchange:
After the IPO subscription window closes, the company lists on a stock exchange-partners for instance include the NSE or BSE in India-and issues its shares. When trading starts, the shares of stock will change value depending upon market conditions, sentiments of investors, and performance of the company.
What are the reasons Companies Go for IPOs?
The most important factor for companies to go public is capital-raising, but there are some other motives, including:
Extension: This enables a company to make way for considerable funds to be raised from the public, money that may be used
Investing in an IPO is one way one can amass fortune at an early stage, but taking it step by step is the best way to go about this as a beginner. Here’s a step-by-step guide on how to invest in IPOs in India:
1. Open a Demat and Trading Account
When you want to participate in an IPO, you need to open a Demat (Dematerialized) account. A Demat account then holds shares electronically while the trading account is for buying and selling shares on the stock market. You can open these accounts through a broker, either online or offline, at any authorized brokerage firm.
2. Research the IPO
Find out about the company that is coming up with an IPO before you invest. Look at the prospectus (red herring prospectus (RHP)) issued: In-depth information about the company, its numbers, business model, prospects, and the risks related to raising money through it.
Some of the factors to be considered are as follows:
Company’s Financial Health: Look for revenue, profits, and debts levels for the company.
Management: Consider the experience of the top management.
Industry Outlook: Know the industry of the business and its future perspectives.
Valuation: Compare IPO price to that company’s earnings, sales, and its competitors for determining whether it is reasonably priced.
Risks: From the prospectus, evaluate the risks indicated like market risks, business risks, and regulatory risks.
3. Submit IPO Application:
Once you have conducted the research, you can submit your IPO application via your broker or directly through your stock exchange platform (for example, NSE or BSE). Open Call. Subscribers can file an application for all of the options available for seasonal IPOs in india through the traditional manner using a paper form or electronically through the various portals. There will also be a mention of the number of shares followed with the price band (if applicable).
4. Bid in the IPO Price Band
For book-built IPOs, one is required to place the bid within the price band indicated by the company. When a bid is made at the upper edge of price range, then shares may get allocated against it, also at a lesser rate if the shares are oversubscribed.
5. Allotment and Refunds
The allotment of shares will be declared after the closure of the subscription period. The shares will be credited to your Demat account in case of allotment. If there is no allocation of shares to you, the application amount is refunded.
6. Listing and Trading
After listing and thus trading of shares, an investor can buy or sell the shares, as they would trade in any stock. Depending on the conditions of the market and the perception of the investors, as well as the performance of the company, the stock price goes up or down.
Risks and Considerations for Beginners:
Although substantial returns can be accrued from IPOs, they are not without their risks. Following are some of the risks and considerations that arise while investing in shares through the IPO route:
Volatility: The stocks of an IPO may be very volatile for the first few days of their listing. The prices vary widely as the market assesses the company’s internal performance.
Overvaluation: Companies often hype up IPOs; hence, the issue price is set higher than the actual value of the company, which may lead to losses for investors.
Minimal Information: As the new company faces an IPO, probably there would not be much information with regard to its long-term growth prospects.
Conclusion
IPOs are great opportunities available for beginners startup companies to invest at ground level with a possibility of growth from the company. But, careful research and thorough diligence must be done here, and understanding of the risks involved must be done before investing. Opening a Demat and trading account, keeping oneself updated, and taking a disciplined approach would help the novice learn about I.