What is an IPO? Types, Benefits & How It Works

An initial public offering (IPO) is the procedure by which private corporations sell their shares to the general public in order to generate equity money from public investors. A privately held company becomes a public company through the IPO in share market. Additionally, this technique gives smart investors the chance to profit financially from their investments.

If you are an experienced investor, IPO investment may be a wise choice. However, not every new IPO is a good opportunity. Risks and benefits are incompatible. It's important to understand the basics before jumping on the bandwagon.

What is an IPO?

IPO stands for Initial Public Offering is referred to as an IPO. It is the procedure by which a privately held firm first makes its stock available to the general public. A major milestone, the move from a private to a public firm, usually involves intense oversight by regulators.

A business that goes public sells its shares on a stock exchange so that the general public can buy them. Raising money to finance expansion, settle debt, and/or complete other business goals is the main objective of an initial public offering (IPO).

Types of IPO

• Fixed Price Offering

The issue price that particular businesses set for the first selling of their shares is known as a fixed price initial public offering (IPO). The price of the stocks that the corporation chooses to make public is open to the investors.

After the matter is resolved, the market's demand for the stocks can be determined. Investors who participate in this IPO must make sure they pay the full share price at the time of application.

• Book Building Offering

In book building, the business launching its IPO gives investors a 20% price range on the equities. Before the ultimate price is set, interested investors place bids on the shares. Investors must indicate here how many shares they plan to purchase and how much they are prepared to pay for each share.

The lowest share price is known as the floor price, while the maximum stock price is known as the cap price. The bids made by investors ultimately decide the price of the shares.

What Is the IPO Process?

The IPO process typically consists of two stages – pre-marketing and actual offering. In the pre-marketing stage, a company planning to go public may announce its intention publicly or invite private bids from institutional investors. It will also select one or more underwriters (usually investment banks), who will facilitate and manage the entire process of IPO, beginning with due diligence, documentation, marketing and finally servicing an issue of shares to the public.

Steps to an IPO

1. Proposals The IPO journey starts with an internal meeting and proposal. We decide if we really need to raise capital, we look at our financials, and we ask ourselves if it’s the right time for the market. Assuming the board gives us the green light, from that point forward- you’re public.

2. Underwriter The company will hire underwriters to determine how many shares should be issued, at what price, to whom they should be sold, and to manage the legal and regulatory issues involved in going public.

3. Team A special team is constituted to manage the IPO. It consists of company officials, legal officers, auditors and underwriters. All prepare returns, take care of regulations so as the company gets ready for IPO.

4. Documentation The company puts together a bunch of important documents like the registration statement (e.g., Form S-1 in the U.S.) that has a lot of financials, business info, risks etc. and files it with regulators (like SEC) to get approval.

4. Marketing & Updates This is when the roadshow takes place and the company, along with the underwriters, present their business to potential investors in order to create interest, trust as well as where investor feedback will allow to finalize the pricing.

5. Board & Processes The company creates a board of directors, internal systems and policies required for a public company in anticipation of going public. If everything goes well with the regulators then these become listed on the stock exchange and are now publically tradable, and your company is publically listed.

6. Post IPO After a company is listed, it needs to report its financials regularly, keep the investors updated, and work towards delivering long-term value under the watch of shareholders and the market. IPO Advantages and Disadvantages

How an Initial Public Offering (IPO) Works

• Preparation Business plans, financial statements, and other essential paperwork must be prepared by the organization. Investment banks are frequently enlisted to underwrite the IPO and help in fixing the shares' debut price.

• Regulatory Approval Regulatory organizations, such as the Securities and Exchange Commission (SEC) in the US or the Securities and Exchange Board of India (SEBI) in India, require the company to submit a registration statement. The business concept, dangers, and financials of the company are all covered in length in this document.

• Marketing The business and its brokers meet with possible investors as part of a "roadshow," which seeks to promote interest in the IPO.

• Pricing The final offering price of the shares is set by the company and its underwriters based on investor demand.

• Going Public The shares are listed, and the company becomes public. This stage is the core of how IPO works.

Who can invest in an IPO?

• Retail Investors (General Public): Individual investors like you and me can apply for IPO shares. Most IPOs reserve a portion of shares for retail investors through online brokers or trading apps.

• High Net-Worth Individuals (HNIs): These are individuals who invest large amounts in an IPO. They often get a separate quota and may have a better chance of allotment, but they also face a higher risk.

• Institutional Investors: Big financial organizations such as mutual funds, insurance companies, banks, and pension funds fall under this category. They often get early access and a large share of the IPO.

• Foreign Investors: In many countries, foreign institutional investors (FIIs) and non-resident individuals (NRIs) can also participate in IPOs, subject to certain rules and limits.

• Employees of the Company: Some IPOs reserve a small portion of shares for the company’s employees at a discounted rate as a benefit.

How to Invest in an IPO?

1. Open a Demat & Trading Account

You need a Demat account to hold shares and a trading account to apply. You can open these with any registered broker.

2. Research the IPO

Read the IPO prospectus to understand the company’s financials, risks, and growth potential before investing.

3. Apply for the IPO

Apply online through your broker or bank using the ASBA method. Enter the number of shares and price (if needed). Your funds will be blocked until allotment.

4. Wait for Allotment

If you receive shares, they’ll be credited to your Demat account. If not, your money will be unblocked and returned.

5. Listing Day

On the day the stock is listed, you can either sell your shares or hold them based on your investment plan.

How to Check IPO Allotment Status – Step by Step

• Method 1: Check via Registrar’s Website.

1. Go to the IPO registrar’s official website – such as Link Intime, KFintech, or Bigshare Services – depending on the IPO.

2. Choose the IPO name from the dropdown list on the allotment status page.

3. Enter your PAN number, application number, or DP Client ID (as per the options available).

4. Click on the "Submit" or "Search" button to see whether shares have been allotted to you.

• Method 2: Check via Stock Exchange (BSE/NSE)

1. Go to the BSE IPO status page or NSE website.

2. Choose "Equity" under Issue Type and select the IPO you applied for.

3. Enter your PAN number or application number and click "Search" to view your allotment result.

• Method 3: Check via Broker Platform

1. If you applied through a broker like Zerodha, Groww, Angel One, or ICICI Direct, log in to your account.

2. Navigate to the IPO or "Order Book" section to find your application details.

3. The allotment result will show whether shares are allotted, and how many (if any) have been received.

Conclusion

An initial public offering (IPO), businesses can raise money and give investors a stake in their possible success. Even while the benefits of IPO can be important, there are risks involved that need to be properly evaluated.

Understanding the IPO full form, the mechanics of how IPO works, and the overall market environment can help investors make informed decisions and possibly earn good returns from future opportunities.

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