Initial public offerings popularly known as IPO investment is a process where a private company or share turns to public shares/company. Let us make this very simple. A company needs to generate adequate financial support to run in the long term. This money is made available from sources such as bank borrowing or share selling.
Share selling means making private shares available to the public. Here, the company sells many shares, and if you buy a share, you become an investor of the company. It’s a win-win situation for both the investor and the seller because the company gets its required funds while the shareholder receives part of the company’s profit in the future. Once the shares are issued in the stock market, it is called the primary market. Later, when sold to the investors and trading takes place every day, they get listed on the secondary market.
Complete details regarding the shares will be provided through the issues of a prospectus. The whole process is done to raise the capital investment of the company and can aid the owner in operating the business. Furthermore, an IPO provides more access for the public to be a part of developing and developed companies.
How to Invest in an IPO?
1. Is it advisable to Invest in an IPO?
The common concern many of the people who want to invest in IPO might be “is it safe?” The answer to this question depends on the company you invest in. By becoming an investor of a company, you are a part of its expansion and decline. Success and failure of the company go hand in hand. Sometimes you might invest heavily in a company hoping it might flourish in the future. Still, an establishment may not last long, and the depreciation might reflect on your investment as well. So, the first step would involve doing basic research and analysis before investing in an IPO. For example, when you invest in a previously established company, the chances of share values to decrease is unlikely.
2. Types of IPO
This is based on the pricing of shares, and here are the 2 types of IPO.
- Fixed price IPOs – as the name suggests, the price of shares is fixed beforehand and cannot be changed. This means all investors get the share at the same prices without bias. An investor need not book a share before getting more benefit.
- Book building – The concept of auction and bidding comes into play here. Unlike the previous type, there is no fixed price for any of the shares. Aspiring investors bid for the shares, and the one with the highest price gets it. The whole process takes 15 days. You need to book the share using your IPO trading account. This needs to be done before the closing date of the share. Further, the range of bidding prices will be provided by the company. Depending on the bids you have made you get your shares. If you do not get any shares, your money will be refunded in the next 15 working days. If your bid is successful, you will be given a confirmatory allotment note on the date of settlement.
3. What is the procedure to invest in an IPO?
The first thing you will need is money. This could be from your savings, deposits, or you can even apply for loans with a reasonable interest rate for this purpose. The next prerequisite would be a Demat account. This is an account to keep track of your transactions and store your stocks. To open a Demat account, you need to submit your PAN card, Aadhar card and address proof. You will get your Demat account created 14 days from the date of submission of the documents mentioned above. After this, either through your bank or trading account, you can apply for an IPO. You also need to know about Application Supported by Blocked Account (ASBA). This is a facility that gives access for banks to block money in your account. It is available both in physical and Demat form. It also eliminates the need to use cheques and drafts during transactions. After this, you will be allotted a number following which you can start bidding for shares and store your stocks.
Best Tips to Start Investing
1. Choose your Shares Wisely
It is of vital importance to choose your stock wisely. It is crucial to study the stocks thoroughly with the required financial research tools. More attention should be paid while investing in a start-up company. Thorough research should be conducted on the ownership, aims and objectives of the company, funding resources and reliability. You can investigate the QIB (qualified institutional buyer) status of the company. If that is oversubscribed, then you can trust the IPO process.
2. Look into the Prospectus of the Company
This should cover the growth and establishment of the company like a private business. When the company started should be the other questions coming to your mind while looking into the prospectus of the company.
3. Cut off Price Investment
The chances of considering your application are more when you invest in the cut off price. This comes handy when you invest in book building type of IPO. If you are a retail investor, and you are particular about holding more shares, this method is ideal.
4. Plan Action
Individual companies have started to clear debts from the past. These types of start-ups do not last for an extended period and investing in such a company will not be fruitful to the investor. So, it is essential to go through the plan of action and their ideas and interest to expand the firm in the long run. If that looks promising and if they have adequate resources to implement it, including manpower, then your investment will also become beneficial.
5. Choose the Right Broker
Brokers act as a mediator between the seller and investor of shares. A reliable broker is essential while investing in an IPO. They have more connections and tie-ups with leading companies, and they manage to get you a fair allotment.