What is an IPO?
When a company needs capital to expand or to repay debts it plans to do equity financing. In order to enlist the stocks of the company in the stock market, the company holds an IPO or Initial Public Offering.
What is the process of offering an IPO?
The IPO process involves the company contacting an investment bank, which facilitates the IPO. The bank values the company valuation, share price, IPO date, and many more details
The company has to also register itself with the exchanges and make an application to SEBI. SEBI checks all the details and documents of the company and decides whether to allow the IPO or not.
The company then markets its IPO to create a buzz to attract more investors. The executives and founders of the company might hold conferences, Question and Answer sessions, and presentations to attract investors.
The IPO is usually held for 3 to 5 working days. The company decides the IPO floor prices, the minimum bid price, and IPO cap price, the maximum bid price. The investors can bid as well as make new bids these days. At the end of the bidding period, the bids are evaluated and stocks are given.
The company decides a cut-off price, which is the final price for the issue to be sold. Once the price is finalized the company along with the bank decides the number of shares to be given to each investor.
What happens in Oversubscription?
Oversubscription is the situation when the demand for the share overshoots the supply. For example, if a company offers 1 crore stocks but the total number of subscriptions receive is 10 crores, the IPO is oversubscribed by 10 times.
In this situation different investors and treated differently:
- QIB: Qualified Investment Banker, get proportionately. For example, if a QIB investor X puts a subscription for 100 shares and the oversubscription for the QIB investors only is 10, X gets 10 shares(100/10).
- HNI: The High Net Worth Investors. The investors who invested more than Rs. 2 lakhs in the IPO fall in this category. They also give share proportionately.
- RII: The Retail Individual Investors. The investors who invest less than Rs. 2 lakhs fall in this category. They are allocated share through lottery method.
How to buy a share from an IPO?
- Get the required form from the broker or the bank, the form may also be found online.
- Fill the form with your bank details and investment amount.
- You will be allotted shares within 10 days after the closing day.
Why you should invest in IPOs?
One of the major benefits of investing in IPOs is that you will have the opportunity to be among the first shareholders of the company. The stock price is determined based on the companies present demand and evaluation, so if the company grows in the future you will earn a profit from it. At the same time, if the company fails(or goes bankrupt) you will face a loss.
IPOs are considered one of the best ways of making money through investing in it is invested in the right company, or else it might to more bad than good.