All You Need To Know About IPO
An IPO or Initial Public Offering, marks the moment when a company offers its shares to the public for the first time. This allows the company to raise equity capital directly from public investors.
During the IPO, the company establishes a direct relationship with investors and the funds raised from them become the company's ‘Share Capital’. Investors who participate in the IPO become shareholders of the company, granting them ownership rights. This is the largest source of funds for a company, enabling it to invest in ‘Fixed Assets’ crucial for its business operations. Shareholders have the freedom to sell their investment in the company through the secondary market.
What Is the Purpose of an Initial Public Offering?
An IPO serves as a fundraising method for large companies, involving the sale of shares to the public for the first time. It enables the company to raise capital, provide liquidity to founders and early investors, and capitalize on a higher valuation. Once an IPO concludes, the company becomes ‘listed’, and its shares can be traded on the stock exchange, accessible to common stock market participants.
Understanding IPO Basics: What Every Investor Should Know
When participating in an IPO, investor should know several details such as, issue name, type, category and price band. The issue name refers to the company going public, while the issue type indicates whether it is a fixed-price or book building IPO. Fixed Price IPO being the companies setting a specific price for the initial sale of their shares, while in a Book Building IPO, the company offers a price band within which investors bid on the shares before the final price is determined. Investors of IPO are categorized into retail investors, non-institutional investors, and qualified institutional buyers. The price band represents the range within which bids can be made for book building issues. Further, it is also important to keep in mind that IPOs can pose higher risks due to their limited performance track record and financial statement analysis.
How do IPO Applications work?
Investors can apply for an IPO through their brokerage firm, either by calling or logging into their account. Brokers facilitate the IPO process by connecting their systems with the stock exchange's main IPO system for online form submissions. If demand for the IPO is high then not all interested investors may be allotted the shares.
SEBI has introduced the ‘Application Supported by Blocked Amount (ASBA)’ facility in the primary market, allowing investors to block application money until allotment basis finalization.
Rules to keep in mind when applying for IPO:
Investors are allowed to submit only one IPO application per PAN number. Submitting multiple applications under the same PAN number will result in the rejection of all applications associated with that PAN number. Further, it is crucial to make payments for an IPO from your own bank account to prevent rejection.
Disclaimer: All content provided is for informational purposes only, and shall not be relied upon as financial / investment advice. Although the best efforts have been made to ensure all information is accurate and up to date, occasionally unintended errors may occur.
