What is IPO? - Meaning, Types, Process & Eligibility

An IPO, or Initial Public Offering, is the process where a company offers its shares to the public for the first time. Before an IPO, a company is usually privately owned, meaning only a small group of people or investors own the company. But after going public, the company allows anyone to buy its shares on a stock exchange. This helps the company raise money for expansion, new projects, or debt repayment. IPOs are an important way for companies to grow, but they come with both opportunities and risks for investors. Let’s take a deeper look at IPOs, their types, the process, and the pros and cons of investing in them.

What exactly is an IPO in the Stock Market?

An IPO is when a company first offers its shares to the public, allowing anyone to buy a small part of the company. Before an IPO, the company is privately held, meaning only a few people own it. When the company goes public, it sells shares through the stock market, and anyone can invest in it. This process helps the company raise money to grow and also allows early investors to sell some of their ownership. After the IPO, the company’s shares are traded on a stock exchange, like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE), and the public can buy and sell them.

Also read: Top 10 IPOs to watch in 2026

Two Main Types of IPOs You Should Know About

There are two major types of IPOs that companies can launch:

1. Fresh Issue IPO: In this type, the company issues new shares to the public. The money raised from selling these shares goes directly to the company to help it grow, pay off debts, or expand its business.
2. Offer for Sale (OFS): In this case, existing shareholders, such as the company’s founders or early investors, sell their shares to the public. The money raised from the sale goes to the shareholders who are selling their shares, not to the company.

Both types of IPOs serve different purposes, but they allow the company to raise capital and give the public a chance to invest.

The Benefits and Drawbacks of Investing in an IPO

Pros of Investing in an IPO:

• Opportunity for High Returns: If the company performs well after the IPO, early investors can make significant profits.
• Getting in Early: IPOs allow investors to buy shares of a company before it becomes widely known and potentially increases in value.
• Diversification: IPOs can be a good way to add variety to your investment portfolio, especially if you invest in companies from different sectors.

Cons of Investing in an IPO:

• Uncertain Performance: There’s no guarantee that the company will do well in the stock market. Sometimes IPOs can underperform.
• Volatility: IPO stocks can be very volatile, with prices going up and down quickly, making them harder to predict.
• Overvaluation: Sometimes companies price their shares too high, making them less attractive to investors if the price falls shortly after the IPO.

Why Should You Consider Investing in an IPO?

Investing in an IPO can be a good opportunity, but it’s not without risks. Here are a few reasons why people choose to invest:

• Early Investment in Growing Companies: Buying IPO shares gives you the chance to invest in a company that may grow significantly in the future.
• Potential for Profit: If the company’s stock price increases after the IPO, you can make a good return on your investment.
• Diversification of Investments: By investing in different companies through IPOs, you can spread out your investment risks.

Risks of Investing in IPOs: Things to Watch Out For

While IPOs can be profitable, there are several risks to keep in mind:

• Unpredictable Market Movements: IPOs are subject to high market volatility, meaning the stock price can go up or down rapidly.
• Lack of Historical Data: Unlike older companies, new IPOs don’t have much of a performance history, making it harder to predict how they will perform in the future.
• Price Fluctuations: The price of IPO shares can be unpredictable. If a company’s shares are priced too high, they might fall in value soon after the IPO.

Step-by-Step Guide to the IPO Process

The IPO process is detailed and involves several steps:

1. Company Decision: The company decides to go public and hires professionals like investment banks to help with the process.
2. Filing with Regulators: The company prepares important documents and files them with regulators like SEBI (Securities and Exchange Board of India), providing detailed information about the company and its financials.
3. Pricing the IPO: The company and its advisors determine the price at which shares will be sold to the public. This is based on market conditions, the company’s financials, and demand for the shares.
4. Subscription Period: The company opens the IPO for a certain period. During this time, investors can apply for the shares.
5. Listing: Once shares are allocated, they are listed on the stock exchange, and trading begins. Investors can now buy and sell shares in the market.

Important IPO Terms You Should Understand

Term

Meaning

Prospectus

A document with details about the company, its finances, and risks involved.

Price Band

The range of prices at which the shares will be offered in the IPO.

Subscription Period

The time during which investors can apply for the IPO shares.

IPO Price

The final price at which the shares are sold to the public.

Listing Day

The day when the company’s shares start trading on the stock exchange.

Book Building

A process to determine the final price based on demand for shares.

Underwriter

A financial expert who helps the company go public and sell shares.

Things to Keep in Mind When Investing in an IPO

Before you invest in an IPO, it’s important to consider the following:

• Do Your Research: Always understand the company’s business model, growth potential, and risks involved.
• Be Ready for Price Fluctuations: IPO stocks can experience significant price changes, so be prepared for volatility.
• Invest in a Diverse Portfolio: Don’t put all your money into one IPO. Spread your investments across different industries and companies.
• Watch the Valuation: Be careful not to overpay for IPO shares. Sometimes, companies set too high of an initial price.

An IPO is an exciting opportunity for both companies and investors. It allows companies to raise capital for growth, while giving investors the chance to buy shares in a company at an early stage. However, investing in an IPO comes with risks. It’s important to do your research, be prepared for volatility, and invest wisely. By understanding the process and keeping these key points in mind, you can make more informed decisions and potentially benefit from the exciting world of IPO investments.