Why Everyone’s Talking About IPOs:
Has the excitement surrounding a large company’s decision to “go public” ever reached you? That’s an IPO in action. IPOs have become a hot topic in the investment world—often bringing excitement, risk, and opportunity. However, what is an initial public offering (IPO), and why is it important?
Table of Contents
In this beginner’s guide, you will learn:
- What exactly is an IPO?
- What makes companies choose to go public?
- How does an IPO work?
- What are GMP, lot size, and other important terms?
- Tips for investing smartly in IPOs
So, let’s get started.
🏢 What Is an IPO?
IPO stands for Initial Public Offering. This is the process by which a company offers shares to the public for the first time on a stock exchange.
In simple terms:
Suppose a successful company decides that it is time to make a big investment and raise money. It invites the public to buy shares in the company. The first time shares are sold to the public is called an IPO.
🤔 Why Do Companies Go Public?
There are a number of reasons why a company might choose to go public:
- To Raise Capital: An IPO can help raise a substantial amount of money for a company to use for growth and expansion or to get listed in the stock market.
- Liquidity creation: Shares are traded easily with low formalities, so ownership is more flexible.
- Enhanced Brand Value: A company gets credibility attached to its name due to the fact that it is listed on a stock exchange.
- Give an Exit to Early Investors: Early employees and founders can sell their shares to the public and realize gains.
🛠️ How Does the IPO Process Work?
The IPO process may seem a bit complicated, but here is an easy way.
- Hire Investment Bankers (Underwriters): They help manage the IPO process and determine share pricing.
- File Draft Red Herring Prospectus (DRHP): This legal document shows the company’s financial details and IPO details.
- Get SEBI Approval (In India): The company needs regulatory clearance.
- Set a Price Band and Lot Size: Investors are told the share price range and the minimum number of shares they can apply for.
- Open for Subscription: Investors can apply during a limited window (usually 3-5 days).
- Allotment of Shares: Shares are allotted based on demand, and if there is an oversubscription, a lottery system is also used in this case.
- Listing on Stock Exchange: The company’s shares are listed on a stock exchange and begin trading publicly.
💡 Key Terms You Should Know Before Applying for an IPO
- Lot Size: The minimum number of shares you need to buy when you apply is called the lot size.
- GMP (Grey Market Premium): Unofficial trading of shares occurs before the listing begins. A high GMP indicates strong demand.
- Cut-off Price: Retail investors often apply at the highest price in the IPO price band for better allocation opportunities.
- Oversubscription: When the demand for shares exceeds the supply of shares.
📈 Should You Invest in IPOs? Pros and Cons
✅ Pros:
- Early access to a company that is growing
- Potential Listing Gains
- Long-Term Wealth Creation Opportunities
❌ Cons:
- High Volatility on Listing Day
- Not All IPOs Perform Well
- Limited Historical Data on the Company
🧠 Tips for First-Time IPO Investors
- Read the prospectus carefully: Understand the company’s business model and financials.
- Monitor GMP and Subscription Trends: These indicate demand but don’t guarantee performance.
- Avoid Overcommitting: Don’t invest more than you’re willing to risk.
- Invest for the Long Term: Think beyond the listing day.
💼 How to Invest in an IPO in India (Step-by-Step Guide)
Investing in IPOs may seem a bit daunting, but the process can be done online and is very easy. Below is a guide to help you get started.
✅ Step 1: Open a Demat and Trading Account
Free Demat Account Links:
- Click here to open a free demat account in Dhan
- Click here to open a free demat account in Angel One
- Click here to open a free demat account in Upstox
📅 Step 2: Track Upcoming IPOs
💻 Step 3: Apply for the IPO Online
📤 Step 4: Wait for IPO Allotment
💼 Step 5: Listing Day— Trade or Hold
Apply with just one lot initially and gain some experience before making a larger investment.
Also Read: 5 Simple Steps to Create a Free Demat Account in India 🧠 Tips for First-Time IPO Investors
- Read the prospectus carefully: Understand the company’s business model and financials.
- Monitor GMP and Subscription Trends: These indicate demand but don’t guarantee performance.
- Avoid Overcommitting: Don’t invest more than you’re willing to risk.
- Invest for the Long Term: Think beyond the listing day.
📝 Final Thoughts: Is IPO Investing Right for You?
IPOs may sound exciting to you, especially when everyone is talking about listings, but smart investing means you should do your homework first, understand the company, and always think long-term.
Whether you are starting your stock market journey or looking to grow your wealth, it is very important to know how IPOs work.
📢Disclaimer: Investment in the securities market is subject to market risks. Please read all scheme-related documents carefully before investing. The information provided in this article is for educational and informational purposes only and is not intended as investment advice. Trading in derivatives, including options, involves substantial risk and is not suitable for all investors. Past performance is not indicative of future results. Readers are advised to consult with their financial advisors before making any trading decisions.
📌 FAQs
Can anyone apply for an IPO?
Yes, anyone with a demat account and the required amount of money can apply.
How much money is needed to apply for an IPO?
It varies, but most IPOs require around ₹15,000 to ₹20,000 to apply.
What happens if I don’t get any allotment?
Your money will be refunded within a few days of the allotment date.
Is GMP a reliable indicator?
It gives an idea of demand but is unofficial. Always analyze the business fundamentals first.