An IPO is a superhit word in the stock market. It keeps popping up in the media and various articles. Headlines like upcoming IPO is a very big or latest ongoing Initial Public Offering are found everywhere and almost all time. This article is all about IPO. You will get to know everything about it here. Let’s go.
What is IPO?
The term IPO stands for Initial Public Offering. It is the process by which a privately held firm becomes a publicly traded company by first issuing its shares to the public. A private firm with a few stockholders shares ownership by becoming public and exchanging shares. The company’s name is listed on the stock exchange as a result of the Initial Public Offering.
Many people think of Initial Public Offerings as massive money-making opportunities—when high-profile companies go public, their share prices skyrocket. While Initial Public Offerings are clearly trendy, you should be aware that they are extremely hazardous investments with uneven long-term returns.
If you are a knowledgeable investor, investing in Initial Public Offerings can be a wise decision. However, not every new Initial Public Offering represents a fantastic opportunity. Benefits and hazards are inextricably linked. Before you get on the bandwagon, you should first learn the fundamentals.
How Does an IPO Work?
Going public is a complex, time-consuming process that most businesses find difficult to navigate on their own. A private firm seeking an IPO must not only prepare for an increase in public scrutiny, but also file a slew of paperwork and financial disclosures to satisfy the Securities and Exchange Board of India (SEBI), which governs public companies.
Hence, a company employs an investment bank to conduct the Initial Public Offering. In the underwriting agreement, the investment bank and the company hash out the financial specifics of the Initial Public Offering. They then file the registration statement with the SEBI, along with the underwriting agreement. The SEBI examines the disclosed information and, if confirmed correct, approves a date for the Initial Public Offering to be announced.
Once the firm and its advisors have agreed on an Initial Public Offering price, the investment bank distributes shares to investors and the company’s stock begins trading on a public stock market, such as the National Stock market (NSE) or the Bombay Stock Exchange (BSE).
Why Does a Company Offer an IPO?
- Offering an Initial Public Offering is a profitable venture. Every firm requires funds to expand, improve their operations, update their infrastructure, repay loans, and so on.
- Stock trading on the open market means more liquidity. It opens the way to employee equity ownership programs such as stock options and other compensation plans, which attract the cream of the crop.
- When a firm goes public, it indicates that the brand has achieved enough success to have its name displayed on stock exchanges. Any company’s credibility and prestige are at stake.
- A public corporation can always issue more stock in a competitive market. This will open the door to acquisitions and mergers because the stocks can be issued as part of the transaction
Types of IPOs
If you are a new investor, you may find the lingo around an initial public offering perplexing. To clear up any confusion, corporations offer two types of IPOs.
Fixed Price Offering
The fixed pricing offer is rather clear. The price of the initial public offering is announced in advance by the company. As a result, by participating in a fixed-price initial public offering, you promise to pay in whole.
Book Building Offering
The stock price is provided in a 20% band in a book building offering, and interested investors put their bids. The lower limit of the pricing band is known as the floor price, and the upper limit is known as the cap price. Investors bid on the number of shares they want to buy and the price they want to pay. It enables the company to gauge investor interest in the initial public offering before announcing the final price.
Key IPO Terms
Initial public offerings, like everything else in the world of finance, have their own lingo. You should be familiar with the following major Initial Public Offering terms:
Common stock
Units of ownership in a public business normally entitle holders to vote on company decisions and receive dividends from the company. When a firm goes public, it sells shares of common stock.
Issue price
The price at which investors will be sold shares of common stock before an Initial Public Offering company begins trading on public exchanges. This is also known as the asking price.
Lot size
The smallest number of shares available for purchase in an Initial Public Offering. You must bid in multiples of the lot size if you want to buy more shares.
Preliminary prospectus
The IPO company’s document discloses information about its business, strategy, historical financial statements, recent financial results, and management. It bears red lettering on the front cover and is commonly referred to as the “red herring.”
Price band
The price range set by the company and the underwriter in which investors can bid for Initial Public Offering shares. It differs depending on the type of investor. Qualified institutional buyers, for example, may have a different price range than retail investors like you.
Underwriter
The investment bank in charge of managing the offering on behalf of the issuing corporation. In general, the underwriter establishes the issue price, publicizes the Initial Public Offering, and assigns shares to investors.
Under Subscription
Undersubscription occurs when the quantity of securities requested is smaller than the number of shares made available to the public.
Oversubscription
When the quantity of shares provided to the public is less than the number of shares applied for, this is referred to as oversubscription.
Should You Invest in an IPO?
Choosing whether to invest in an Initial Public Offering of a relatively new company is a difficult decision. In the stock market, being skeptical is a positive attitude. The points given below can be a part of your checklist for investing in the Initial Public Offering.
Background checks
Because the company is new to the public, there is simply insufficient historical data to support your conclusion. The red herring is the data on the Initial Public Offering specifics offered in the prospectus; you must scrutinize it. Learn about the fund management team and their intentions for utilizing the Initial Public Offering funds.
Who is Underwriting
Underwriting is the process of raising funds by issuing new securities. Be wary of tiny investment banks’ underwriting. They may be willing to back any enterprise. Typically, a successful Initial Public Offering is backed by large brokerages with the ability to endorse a new issue well.
Lock-up Periods
Initial public offering frequently experiences a severe downturn after going public. The lock-up period is to blame for the drop in share price. A lock-up period is a contractual provision that specifies the time period during which firm executives and investors are not permitted to sell their shares. After the lock-up period ends, the share price experiences a drop in its price.
Flipping
Flippers are those who buy stocks in a company that is about to go public and then sell them on the secondary market to make quick money. The trade action starts by flipping.
Things you should know before investing in IPO
1. If you purchase an Initial Public Offering for the company, you are exposed to its fortunes. You have a direct impact on its success or failure.
2. This asset in your portfolio has the most potential to earn rewards. On the other hand, it might ruin your investment without warning. Hence, remember that equities are subject to market volatility.
3. You should be aware that a firm that sells its stock to the public is not obligated to repay the funds invested by the public.
4. Before investing in an IPO, you should consider the risks and rewards. If you are a beginner, read an account written by an expert or a wealth management business. If you are still unsure, consult with your personal financial counsellor.
How to apply for IPO
Nowadays, because of the online application process it has become easier to apply for an initial public offering. However, if you are a new investor, you should first educate yourself.
The first and most critical consideration is finance. You will have to make a payment in advance, whether it is a fixed price or a book building IPO, and you must have funding ready. Investors might utilize their own funds or obtain a loan from a bank or NBFC.
However, you cannot buy in equities without a DEMAT account. So, the next step is to open a DEMAT account. You can utilize the DEMAT account to receive all kinds of financial instruments, including gold bonds, corporate bonds, shares, and more.
How to know about upcoming IPO
IPO investors must keep watch on upcoming Initial Public Offerings in order to capitalize on any possibilities. The methods listed below might help you keep track of upcoming Initial Public Offerings.
Exchange Websites
Exchange websites are the most dependable sources of information about upcoming IPOs. Every exchange website has a dedicated section for upcoming Initial Public Offerings. It is wise to obtain information directly from exchange websites because it is official, reliable, and will have the most up-to-date information.
Broker Website
You will invest in the upcoming Initial Public Offering through your broker’s trading terminal. So, your broker will also have a section of the upcoming Initial Public Offering on their website and app. You can keep an eye on it too.
Google News IPO
A Google News search using relevant search phrases such as “IPO” might provide some of the most recent news items, including analyst opinions, market commentary, and other developments for any prospective Initial Public Offering sale. Google News is a one-stop shop for all global Initial Public Offerings, independent of the exchange or nation in which they are listed.
Summary
An investor must decide whether or not to participate in an initial public offering. Choosing the appropriate IPO offer might be difficult, but if you succeed, Initial Public Offerings can be a valuable asset in your portfolio. With this we wind up this article. Do comment on any query you have in mind. Hope you liked the content. Share it with your family and friends.