IPO - Initial Public Offer

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

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

To Apply in IPO - Open Demat Account Now.

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