IPO (Initial Public Offering) is a process by which a private company whose shares are only held by promoters goes public and offers its shares to public for holding or trading purposes for the first time. The shares get listed on stock exchanges of our country which are NSE (National Stock Exchange) or BSE (Bombay Stock Exchange).
Why does a company offers a IPO?
Every company needs money, IPO’s are usually offered when a huge amount of money is required by company because a lot of money is raised through an IPO. It may be for expansion of the company, repayment of debt, or for meeting general corporate purposes or any other reason. Getting listed on stock exchanges also increases liquidity, this opens up the path for stock options and attract traders. A public company can always issue more stocks. This makes acquisitions and mergers easy as the stocks can be issued as a part of the deal.
How does a company offer an IPO?
Companies hire investment banks to market, create demand, and set the IPO price and date, and more. The RDHP (red herring prospectus) is produced and submitted along with other documents, it is then verified by SEBI (Security and Exchange board of India). The RDHP file is most important document for retail investors and is a must read before applying for the IPO. A RDHP document contains all information about company like its profit, revenue, future plans, debt, etc.
Should we invest in the IPO?
Deciding for applying for an IPO of a new company is pretty much risky. Well, equity market itself is very much risky. So, how will be choose the right IPO for us, which will give us profit.
Since, there is no track record of past as company is going to list for first time. We can conduct background check on company. IPO prices usually fall after listing in gains, this is because of lock up period. A lockup period is period of time in which company executive and investors are not allowed to sell their shares, after end of lock-up period the share prices experience drops. Also, we can check up the valuations of the company like, on what P/E ratio they are trying to get listed, what is their segment and how much is their share in that segment market, who are its competitors? And etc. Do your own research on IPO but one should also consider asking his financial advisor or listening to the reviews of experts on things and one should consider their risk taking capacity and their risk to reward ratio.
How to apply for an IPO?
So, first of all if we want to apply for an IPO we need to have a demat account. Demat account is an account in which the shares purchased by an investor are held. One can open a demat account very easily as there are a lot of discount brokers present like Zerodha, Upstox, etc. The whole process of account opening is very easy and hassle free and an account can be opened within few minutes. Now, we can apply for the IPO via these apps or by Internet Banking through banks. If you use broker you need to pay through UPI, and if you apply via net banking the amount is blocked by bank in your account.
Picking the right IPO poses a bit of a challenge to investor, but if one is able to successfully overcome it, IPOs could be very rewarding and can give you great returns. So, stay alert, stay aware and Happy Investing!!!