What Is an Initial Public Offering (IPO)?
An initial public offering (IPO), a privately owned company, refers to offering shares or listed in a share of the stock exchange of a private corporation to the public in a new stock issuance, making them available to buy food to the general public.
But when they’re undeniably trendy, you need to understand that IPOs are risky investments, delivering uncertain returns over the longer term. Most people think of IPOs as big money-making opportunities, and high-profile companies grab headlines with huge share price gains when they go public. An IPO allows a company to increase capital from public investors. The transformation from a private to a public company can be beneficial for private investors to realize gains from their investment fully. It generally includes a shared premium for current private investors. Meanwhile, it allows public investors to participate in the offering.
An initial public offering (IPO) refers to the process of offering shares of a private corporation in a new stock issuance to the public. Companies must meet exchanges and the Securities and Exchange Commission (SEC) requirements to grasp an IPO. IPOs allow companies to attain capital by offering shares through the primary market.
Companies hire investment banks to market, gauge demand, set the IPO price, etc. An IPO can be an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment in the market.
” Also Read: Steps to plan an early retirement “
An IPO is a large step for a company as it provides the company with access to raise a lot of money. It gives the company the power to grow and expand. The increased transparency and share listing authenticity can also be a factor in helping it obtain better terms when seeking borrowed funds as well. When a company reaches a stage in its growth and improvement process where it believes it is mature enough for the rigours of SEC regulations and the benefits, duties, and responsibilities to public shareholders, it will begin to advertise or promote its interest in going public.
Typically, this is considered a stage of growth that occurs when a company has reached a private valuation of approximately $1 billion, also known as unicorn status .though, private companies at several valuations with strong fundamentals and proven profitability potential can also qualify for an IPO, depending on the market competition and their ability to meet listing requirements to qualify it.
Post-pandemic period, investment has become a popular source of income, especially for millennials. Today, investors have the opportunity to invest in high-quality private companies to generate returns. This process is, known as an Initial Public Offering (IPO), can benefit both investors and companies.
Why is investment needed?
First mover advantage
The companies that launch an IPO are generally startups or growing businesses. Many companies with high potential growth or credibility need to raise funds for expansion. Investors benefited from the first-mover advantage by investing in these rapidly growing companies before they grow.
With an IPO, companies are seeking growth and expansion. Hence, the IPO price is normally at a discounted price that could result in a rise in the company’s share price in the future. The IPO market allows investors to invest in such companies at an affordable price at the start of their growth.
As an investor’s life progresses, their financial goals change from time to time, from buying a house for a family to sending children to college to planning for retirement. IPO investments can completely help with these long-term savings goals. Through IPOs, investors mainly invest in equity instruments that can bring better returns.
” Also Read: Understand The Difference between SIP And Mutual Funds “
To launch an IPO, a company must affiliate with SEBI regulations. SEBI has put penalties on companies that do not go with these terms. Thus, the entire process of issuing shares and related documents is transparent. This builds investors’ trust. Furthermore, it is beneficial for the company to gain more clients or trust.
How can you invest?
Each investor must ask himself four-question before an IPO:
- Is it possible for you to invest the necessary funds?
- How much amount are you interested in investing in the IPO?
- What is your risk appetite? Are you willing to accept a certain level of risk with it?
- What is your purpose for investing in an IPO? In other words, what are your financial objectives?
To invest in an IPO, the investor will need the following account:
- Demat Account – This is a dematerialized or electronic account in which shares are stored.
- Trading account: Investors who want to invest online in an IPO must have a trading account. It will allow them to trade in shares according to their preferences and choices.
- Bank account -An IPO application needs a bank account. If the IPO application is accepted, your payment will be debited from the bank account.
Now, investors have the option to apply for IPO on two routes:
- Via ASBA facility provided by the bank.
- Via UPI
- The ASBA requires investors to log into their net banking account.
- In the request tab, they have to click on the IPOs option and apply for the one under the list of IPOs.
- Investors share the information regarding the number of shares and the bid price. Since it’s a bank account, personal details like name, PAN should be filled in.
- After investors accept the TIC and confirm the transaction, the amount will be blocked from their account and debited if their IPO application is accepted; otherwise, it will be released.
- Log in to the trading account.
- Choose the IPO to invest in.
- Submit the number of shares and bid price of shares.
- Fill in the required personal information, including the UPI ID.
- Fill out the IPO form completely and accept the terms and conditions. Amounts will be blocked from their accounts and debited if the application for IPO is accepted. If not, the funds are released.
” Also Read: The Lesser Use Of Real Money “
An IPO isn’t a modern concept like today. Companies have been raising funds via issues of shares for many centuries. You, too, can subscribe to an IPO or your bank account and get your allotted shares deposited into your Demat account.
If you’ve been observing your favorite company and waiting to get listed in it, an IPO can be the best way to gain partner ownership of it quickly. By now, we hope you have a clear idea about how an IPO can turn into a smart investment IPO with due carefulness and research.
Consider the above factors when deciding if a specific IPO is worthwhile. Investors must ensure they have filled in all the required information appropriately to avoid rejection of their IPO investment application. You can always consult a financial advisor for any assistance for more clarity.