Understand the process of investing in an initial public offering
Everything there is to know about IPO, from its process to benefits
Investing in an IPO, Initial Public Offering is undoubtedly a smart choice. The profitable returns you can earn from an IPO are promising. But you must understand the concept of IPO right before investing in one. In this article, we have covered everything there is to know about IPO–from its definition, process to benefits.
What does an IPO mean?
- An IPO occurs when a privately held company becomes a public company by offering its shares to the public for the first time. An IPO is initiated by a company to raise capital from public investors, facilitate easy trade and increase liquidity, and monetise the investments made by the existing shareholders.
- All investors can access the details of an IPO from the prospects issued by the company. Prospects is an extensively detailed document that holds all the information about the proposed offering. After the company goes public with its shares, you can find their shares listed and available for trading in the open market.
How does an IPO process take place?
Before a company comes up with its IPO, it is considered a privately held company. Having a limited number of shareholders—founders, family, and professional investors.
As the company grows and reaches a stage of maturity where it is ready to qualify the criteria set by the Securities and Exchange Board of India (SEBI) for having an IPO and can provide benefits to its shareholders, it can prepare to go public.
Moving from private to public is a big step for both the company and its shareholders. With the IPO, the company can draw in funds from public investors and work towards expansion. Plus, having your company listed at the stock exchange adds credibility to your company name. This ensures investors that your company's works in a transparent manner and draw in better investors.
When a company initiates an IPO, its shareholders go private to public. The private shareholders can either sell or retain their shares on the launch of the IPO. Public investors can also then hold shares. And the price of their privately held shares changes to the public trading price, favouring the private stakeholders.
Types of IPO
There are two types of IPO based on their method of pricing.
Fixed price offering
Fixed price offering is very simple to understand. You can pay the initial price set by the company during the launch of the IPO. Note that investors have to pay the full price to buy shares. Companies get an approximate idea about the demand for the shares in this method.
Book building offering
Under the book building offering method, the company offers shares at a 20 % price band to its investors. Here the investors can bid on shares before the final price is decided. In order to bid, the investors need to specify the number of shares and the price per share they are willing to purchase.
The lowest price is called the floor price, while the highest is the cap price. The final price of the share is determined based on the bids made.
What are the eligibility norms to invest in IPO?
Any adult engaging in a legal contract can invest in an IPO. However, there are a set of eligibility norms that investors need to meet; they are as follows:
Any individual interested in buying shares of an IPO must hold a PAN Card issued by the Income Tax Department to invest.
The individual must hold a valid Demat Account to make trades.
Having a trading account is not compulsory, as the Demat Account serves all-purpose. However, if the induvial is looking to sell his shares, having a trading account is necessary.
It is usually advisable to open a trading account and a Demat Account to trade smoothly.
Read more about the document requirements to open a Demat Account Click Here.
HDFC Bank assists you in participating in the stock market with utmost ease and comfort. You can open a Demat and Trading Account with us and avail of facilities that assist in margin trading, as well as currency and commodity trading. We provide robust research services and enhance your trading experience with our partners' quick and efficient transfer mechanisms.
Benefits of investing in an IPO
Start on early – With IPOs, you get an opportunity to start investing in high growth potential companies from the ground level. Putting you in a favourable position to gain reasonable returns efficiently
Meet your long terms goals - IPOs are equity-linked investments. This means you are likely to earn higher returns in the longer run. Which helps you meet your long-term financial goal better.
Absolute transparency – When you invest in an IPO, the company's price per share is mentioned in its prospectus. All investors have the same access to price. This may not be the case post-IPO as the share price will largely depend on the market rate and your broker. All investors have the same access to price.
Invest small. Earn big – IPO share prices are usually low as the company launches the IPO at a discount offer. Investing during the IPO window is beneficial. After that, the price is expected to rise, and you might have to buy the shares at a higher price.
Open a Demat Account with HDFC Bank today and investment in an IPO with a few clicks!
Looking to open a Demat Account? Click here to get started.
*Terms and conditions apply. This is an information communication from HDFC bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.