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How Does the Allotment Process of an IPO Work

07 Sep 2023

Basically, an IPO represents an offer of company shares owned by a private company, to the public for the very first time. Before the company goes public, the company is not listed on any stock exchange as it is a private entity of whose shares are held by owners and founders, their relatives and friends, etc. Once the company offers the public at large an IPO, the company ‘goes public’ and its shares can be traded on the stock exchange. If you wish to invest in an IPO, there are several factors you should consider first, but knowing the allotment process is vital too. Stay updated on the latest Upcoming IPO 2023!

IPO is the first time that the shares of a company are made live for public (retail) investments. This is a significant step in a company's journey, as it transitions from being privately owned to becoming a publicly traded entity. It's important to note that not everyone who applies for shares will receive an allotment.

Important Points

While an IPO is being prepared to be offered, the placement of bids occurs, these being within a specific range of prices. Finally, the price of a share of such a company is established. Typically, shares of a company that are offered by an IPO are segregated into three groups. One group of shares is kept aside for institutional investors to make an IPO investment. The other is for non-institutional investors, and the third, is reserved for retail investors. Additionally, in any IPO, shares must be sold in batches and not on an individual basis. Normally, companies that offer shares in IPOs usually ensure that each bidder gets a minimum of one lot of stock that was bidded for. You should be aware of all this before trying for allotment in any  upcoming IPO, for instance, the promising LIC IPO. 

The Process of IPO Allotment

The process of allotting shares in an IPO is fairly simplified. Investors who are interested in investing in any IPO are free to place bids for a particular lot of shares. In case shares are issued at a specific price that is fixed (called the ‘issue price’), then every bid that is made is done so at that fixed price. Nonetheless, the value of shares offered in an IPO can also be decided after evaluating the demand for the said shares, and this is done via the ‘book building method’. 

The Book Building Method of Share Allotment

In the process of book building for the allotment of shares in an IPO, bids are made within a range of prices, ultimately determining a price for the share. Every bid that is made at the set price gets shares, as well as those above the set price. Consequently, if you believe, as an investor, that there may be chances that any given IPO attracts a high demand (like say, if you think an IPO may be subscribed to many times over), it is wise for you to bid for stocks at the price which is the cut-off price. While you are bidding for your shares in an IPO application, if you select the option of ‘cut-off’ price, you will be able to buy shares (if allotted to you) at that price even if the price is determined as higher later. 

Invest in Any IPO

To invest in an IPO (Initial Public Offering), you have to open a Demat account. You can do this with an efficient broker like Motilal Oswal where you get to open a free Demat account. The site also has IPO listings of upcoming IPOs you may want to do research in and invest. One you fill in an application form and enter the amount of shares you wish to be allotted (from a maximum amount that is offered by the company), you may submit this. Then, the company decides whether it will allot shares to you.  In case you are already a shareholder of a parent company (if this is applicable), you are at an advantage for being allotted shares.

Understanding IPO allotment process is essential if you're considering investing in an IPO. It helps you manage expectations and make informed decisions based on the potential outcomes of the allotment process. Aspiring IPO investors should acknowledge the uncertainty of allotment and evaluate their strategies accordingly.


Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 


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