An Initial Public Offering (IPO) is one of the many ways through which companies raise money. The funds raised in this manner can be used by the company for its day to day operations. For instance, it could use the funds to acquire new assets, expand its business, or even pay off existing loans.
IPOs aren’t just beneficial to the companies issuing them though. Even investors such as yourselves can take advantage of them. An Initial Public Offering presents you with a rare opportunity to participate in the wealth creation process early on. In fact, many individuals who have invested in IPOs have enjoyed stellar returns on their investments a few years down the line.
If you’re someone who is interested in investing in an upcoming IPO, then here’s everything you should know about it.
An IPO is the process through which a company basically sells its shares to the general public for the first time. Any investor interested in purchasing the shares of the issuing company can apply for the IPO. And if the application is accepted by the company, the investor would be allotted its shares.
Once all the shares are allotted to the investors, they’re then listed on a stock exchange like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). Here, the investors can buy and sell shares of the company amongst themselves.
And as you’ve already seen above, a company that raises funds by selling its shares to the public can use them to further their business operations.
Now that you’ve seen what an IPO is, let’s delve into some things that you should look into.
There are two kinds of Initial Public Offerings that companies can opt for - book building IPOs and fixed price IPOs.
In a book building IPO, the company releases a price band, with a lower and upper price limit. Investors desirous of purchasing the company’s shares would have to make a bid for them by specifying a price within this band. The final IPO price is determined by taking into account the price at which the maximum number of bids were placed.
In a fixed price IPO, on the other hand, the price at which the company intends to sell its shares is communicated outright and is fixed.
All upcoming IPOs have a sort of a timeline that they adhere to. Knowing what the timeline is can help you get a better understanding of the process. Here’s a quick look at how an IPO progresses from start to finish.
Once all of the legal formalities related to the IPO including the filing of the final Red Herring Prospectus are complete, the company announces the opening and closing dates of the upcoming IPO.
A few days after the IPO issue is closed, the company processes all of the applications and allots shares to eligible investors.
Investors who weren’t lucky to get any shares allotted by the company are refunded the amount that they paid during the IPO application process.
The allotted shares are automatically credited to the demat accounts of the eligible investors by the company.
The shares of the company are finally listed on the stock exchanges and can be bought and sold freely by all investors.
The Red Herring Prospectus is an important document in connection with an Initial Public Offering. It contains key information about the company, its business, its financials, and its management. If you’re interested in applying for an upcoming IPO, this is the document that you should pay attention to to get to know about the company.
Another major thing you need to know about Initial Public Offerings is that you mandatorily need a trading and demat account to apply for one. If you don’t have one, you can simply open a demat account and a trading account within a few minutes by visiting the website of Motilal Oswal.