IPO definition

IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. A private company that has a handful of shareholders shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the stock exchange.

How Does a Company Offer an IPO?

A company before it becomes public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, along with the underwriting agreement, they file the registration statement with SEC. SEC scrutinizes the disclosed information and if found right, it allows a date to announce the IPO.

Why Does a Company Offer an IPO?

1. Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc

2. Trading stocks in the open market mean increased liquidity. It opens door to employee stock ownership plans like stock options and other compensation plans, which attracts the talents in the cream layer

3. A company going public means that the brand has gained enough success to get its name flashed in the stock exchanges. It is a matter of credibility and pride to any company

4. In a demanding market, a public company can always issue more stocks. This will pave the way to acquisitions and mergers as the stocks can be issued as a part of the deal

Types of IPOs

If you are a new investor, you may find all the jargon around an initial public offering a little baffling. To clear your confusion, there are two major categories of IPOs offered by companies. 

Fixed Price Offering 

Fixed price offering is pretty straightforward. The company announces the price of the initial public offering in advance. So, when you partake in a fixed price initial public offering, you agree to pay in full.  

Book Building Offering 

In book building offering, the stock price is offered in a 20 percent band, and interested investors place their bid. The lower level of the price band is called the floor price, and the upper limit, cap price. Investors bid for the number of shares and the price they want to pay. It allows the company to test interest for the initial public offering among investors before the final price is declared.  

Who is eligible to invest in an IPO?

Technically speaking, any adult who is competent to enter into a legal contract is eligible to apply in the IPO of a company. Of course, it is essential that you have a PAN card issued by the Income Tax department and you also have a valid demat account. Remember, having a trading account is not necessary in the case of IPOs, a demat account alone is sufficient. However, if you want to sell the shares on the listing then a trading account will be required. That is why brokers will advise you to open a trading account along with a Demat account when you apply for an IPO for the first time. An important point to be remembered here! When you apply for an IPO, it is not an offer but an invitation to offer. Only when the IPO issuer offers you shares, does it amounts to an offer?

How to apply for an IPO

There are two important questions you need to address here: How to apply for IPO online and the IPO application process. Here is what you need to know when you apply for an IPO of a company

• IPOs come in two varieties viz. Fixed Price IPOs and Book Built IPOs. In a fixed price IPO, the company fixes the IPO price in advance as the sum of the par value and the premium. You can only apply for the IPO at that price. In a Book Built issue, the company will only provide an indicative price range for the IPO and the final price of the IPO will be discovered through the book building process. Nowadays, most the IPOs are predominantly through the book building route only.

• IPOs have three classes viz. Retail, HNI and Institutional categories. Investments up to Rs.2 lakhs in an IPO are classified as retail investors. It is beneficial to invest in the retail quota because the allotment methodology is designed by SEBI to ensure that as many retail investors as possible get allotment. Thus, your chances of allotment are much higher in this case. In the case of HNIs, the allotment is proportionate while in the case of institutions the allotment is discretionary.

• You can bid for IPOs through the offline method or through the online method. In the offline method, the form is filled up in physical form and submitted to the IPO banker or to your broker. In an online application, you can log in the application directly through the trading interface provided by your broker. The advantage of the online IPO is that most of your data is automatically populated from your trading / demat account thus reducing the clerical effort from your side. That largely simplifies the online IPO application form fill-up process. In fact, IPO online application is the preferred mode.

• Under the book built method, the basis of allotment is finalized within 10-12 days and the demat credit also happens within a couple of days after that. Once the shares are in your demat account and the stock is listed on the exchanges, you are free to sell the shares. As stated earlier, you need a trading account to sell these shares.
   

To Apply in IPO - Open Demat Account Now.