What is IPO : Full Form, Meaning, Types, Benefits, & How it works?

What is an IPO?

An Initial Public Offering (IPO) is the process by which a private company sells its shares to the public for the first time to raise equity capital.

This process transforms a privately held company into a publicly traded one. Through an IPO, companies offer shares to institutional investors, high-net-worth individuals (HNIs), and retail investors. Once listed, these shares can be freely traded on stock exchanges.

Companies raise capital through IPOs to fund expansion, repay debt, or enable early investors to exit their positions. For investors, IPOs present an opportunity to access shares at the offering price before they begin trading on the secondary market.

What is IPO in Stock Market?

In the stock market, an IPO marks a company's entry into public trading. Before an IPO, a company's shares are held by a limited group of private investors. After the IPO, shares are listed on stock exchanges where anyone with a demat account can buy and sell them.

The stock market provides liquidity and price discovery for IPO shares. Regulatory authorities oversee the IPO process to ensure transparency and protect investor interests. Once listed, the company must comply with ongoing disclosure requirements and corporate governance standards.

IPO shares are initially offered in the primary market, where the company receives capital directly from investors. After listing, shares trade in the secondary market, where investors buy and sell among themselves without affecting the company's capital structure.

How Does an IPO Work?

The IPO process involves multiple stages, from initial planning to eventual listing on stock exchanges. Here's how it typically unfolds:

Engaging an Underwriter or Investment Bank

The journey towards an IPO begins with selecting an underwriter or investment bank. These financial experts play a pivotal role in analysing the company's financial health, managing the overall IPO issuance, and acting as a bridge between the company and potential investors.

Preparing for IPO Registration

Companies in India must adhere to IPO guidelines by regulatory bodies like SEBI. The first step involves crafting a comprehensive registration statement and a Draft Red Herring Prospectus (DRHP). These documents give potential investors essential insights into the company's operations, financials, and plans.

SEBI Approval and Verification

Once the registration statement and DRHP are ready, they are submitted to the SEBI for approval. It meticulously verifies the disclosed information to ensure accuracy and transparency. Upon successful verification, the company receives the green light to proceed with its IPO plans.

Listing on Stock Exchanges

With SEBI's approval secured, the company can apply to list its public offering on the stock exchanges. This crucial step marks the company's official entry into the public trading arena, allowing investors to buy and sell its shares on the open market.

Strategic Marketing Initiatives

Companies embark on comprehensive marketing campaigns to generate interest and attract potential investors. These efforts may include social media outreach, roadshows, advertisements, and investor presentations to showcase the company's value proposition and growth potential.

Setting the Price

Determining the share offering price is an important decision for the company. It can be accomplished through either a Fixed Price or Book Building Offering method, each with its considerations and implications.

 Facilitating the Bidding Process

Investors can place bids within the specified price range during the bidding process. This phase typically spans several days, allowing investors to adjust their bids before the final allocation.

Allocation and Allotment

Following the conclusion of the bidding process, the company, in conjunction with the underwriters, allocates shares to successful applicants. In cases of oversubscription, partial allotments may be made to ensure fair distribution.

What are the Types of IPO?

IPOs are offered through two primary methods, each with distinct characteristics:

Book building offers better price discovery as it aligns the share price with actual market demand, while fixed price offerings provide transparency and simplicity for retail investors.

What are the IPO Advantages and Disadvantages?

What are the Benefits of Investing in an IPO?

Early Entry into Promising Companies IPO investors can acquire shares at the offering price before public trading begins. If the company performs well, early investors may benefit from listing gains and long-term capital appreciation.

Potential for High Returns Well-researched IPO investments in fundamentally strong companies can deliver substantial returns as the business grows and market recognition increases.

Portfolio Diversification IPOs provide exposure to new sectors and emerging businesses, helping investors diversify beyond established stocks and reduce concentration risk.

What are the Disadvantages of Investing in IPO?

Volatility on Listing Day Share prices can fluctuate significantly on listing day due to market sentiment, demand-supply dynamics, and broader market conditions. Opening prices may be either higher or lower than the IPO price.

Lack of Historical Performance Unlike established companies, newly listed firms have limited publicly available financial data. This makes it difficult to assess long-term performance trends and stability.

Overvaluation Risk Some IPOs are priced aggressively to maximise capital raised. If the valuation exceeds the company's intrinsic value, share prices may decline after listing as the market adjusts.

How to Apply for an IPO?

Applying for an IPO requires a demat account, bank account, and PAN card. You can apply through two methods:

Through ASBA (Application Supported by Blocked Amount)

ASBA allows you to apply for IPO shares through net banking or mobile banking. The application amount is blocked in your bank account until allotment. If shares are allotted, the amount is debited; otherwise, it remains in your account, continuing to earn interest.

Steps to apply:

1. Log in to net banking or mobile banking
2. Navigate to the IPO or investments section
3. Select the desired IPO from available offerings
4. Enter your demat account details (DP ID and Client ID)
5. Specify the number of lots and bid price
6. Submit the application; funds will be blocked immediately

Once the allotment process is complete, shares are credited to your demat account if the application is successful. If shares are not allotted, the blocked amount is released back to your account automatically.

Through Trading Account

If you have a trading account with a broker, you can apply directly through their platform:

1. Log in to your trading account
2. Access the IPO section
3. Select the IPO and enter bid details
4. Complete the application through net banking or UPI

How to Analyse an IPO Before Investing?

Evaluating an IPO requires examining multiple factors beyond market hype. Here's a framework to assess IPO opportunities:

Company Fundamentals Review the company's financial statements in the prospectus. Examine revenue growth, profitability, debt levels, and cash flow patterns. Compare these metrics with industry peers to gauge relative performance.

Industry Outlook Assess the sector's growth potential and competitive landscape. Industries with strong tailwinds and favourable regulatory environments tend to support better long-term performance.

Promoter Background Investigate the experience and track record of the company's management team and promoters. Strong leadership with relevant industry experience increases the likelihood of successful execution.

Use of IPO Proceeds Companies disclose how they intend to use the raised capital in the prospectus. Funds allocated toward growth initiatives, capacity expansion, or research indicate future-oriented planning. If proceeds are primarily for debt repayment or promoter exits, exercise caution.

Valuation Assessment Compare the IPO price with the company's intrinsic value based on earnings multiples, price-to-book ratio, and peer comparisons. Overvalued IPOs may face price corrections post-listing.

Risk Factors Every prospectus includes a risk factors section. Read this carefully to understand potential challenges, regulatory changes, or market dependencies that could affect the business.

Conclusion

IPOs provide opportunities to invest in companies at the early stages of public trading, but require careful evaluation. Assess company fundamentals, industry outlook, promoter credibility, and intended use of funds before applying. Use ASBA or UPI facilities for convenient application processes. Balance the potential for returns against risks like listing day volatility, limited historical data, and overvaluation. Informed decisions based on thorough analysis improve the likelihood of successful IPO investments.