How to invest in an IPO-Everything you need to know?
Initial Public Offerings, well known as IPO, is a process that transforms the privately held companies into public companies. It is a type of public offering in which a private enterprise sells a portion of its stake to the investors. An IPO is a significant step for the company as it helps to infuse new equity capital in the firm.
After IPO, the company's shares could be easily traded in the open market and hence provides an opportunity for the company to raise funds in the future for its expansion and growth. The institutional investors, as well as the general public, can invest in IPO. The details about the first sale of shares are provided to them through the issues of a prospectus.
Is it good to invest in an IPO?
Every new-born investor wants to know if it is good to invest in an IPO, so let us discuss the answer to this question. An IPO is an opportunity to grab the stake and invest in the business of future industry leaders at very competitive prices. This is the best time to buy multiple shares of a company that is going to flourish in the future. Once the company has already established itself, the prices for shares of that company will touch the sky.
But investing in an IPO is not always a happy ending. Risk and rewards come hand in hand as far as IPO is concerned. Sometimes the business you thought would flourish, fails miserably, and you end up losing your hard-earned money. Sound research and analysis before deciding to invest in an IPO is a must to prevent yourself from drowning your money.
How to invest in an IPO?
To invest in an IPO, investors should follow certain steps to ensure that they are on the right track. Proper knowledge of these steps will help an investor to invest in an IPO without facing any tribulations.
Do your homework before you invest in IPO:
The primary step for investing in an IPO is to study and research the company that you want to apply for. The best way to get an informed idea about its business plan and its reason for going public is to go through the prospectus issued by the company. You can get the prospectus on the Securities and Exchange Board of India's website. A lot of hype encircles the IPO, and this is what you need to avoid. Gather knowledge about the company's performance in its past and how it plans to invest the funds raised through IPO in the future. After collecting and understanding all the information, choose wisely before investing.
Arrange the Funds:
Once you have decided about the IPO you want to invest in, the next step is to arrange the funds for the same. To purchase IPO, savings of the investor can be used. The shares can be bought only in lots and so a good amount of funds is required to invest in IPO.
Lot size means the minimum number of shares that the company offers in a single transaction. You cannot buy one or two shares according to your will.
Let us understand this with the help of an example:
Suppose a company has decided to go public and has determined its lot size to be 103 shares. Now, since you wish to invest in this IPO, you will have to purchase a minimum of one hundred and three shares at a go. In case you want to buy more shares, you will have to buy another lot consisting of 103 shares. This means you will become the shareholder of the company having 206 shares in total that is 2 lots. The basic understanding from this example is that shares in IPO can be purchased only in the multiples of the lot size.
If an investor does not have enough funds, he can always choose to apply for a loan facility. Several nationalized banks, private banks, and stockbrokers like Angel broking offer the facility of a loan at cheap rates.
Opening a Demat cum trading account:
Any investor who wishes to apply for IPO should compulsorily have a Demat account. This is the most important prerequisite for investing in an IPO. Demat account facilitates the buying and selling of securities online. To open a Demat account, some documents like Aadhar card number, PAN Card, address, and identity proofs are required. There are a lot of intermediaries and stockbrokers in the market, through which you can easily open a Demat account online in a few minutes.
Here is the list of top stockbrokers for you, so that you don’t need to wander around the internet to open a Demat account.
The application process:
The investor needs to be familiar with the word ASBA to understand the application process. Application supported by a blocked amount is a facility that allows banks to block the money in the account of investors at the time of placing the bids. At the time of applying in an IPO, along with the details related to lot size, bid number, and more, the investor should agree to block their funds for such investment.
The next step is bidding. Here, the investors are required to bid a price from the price range decided by the company. In the range, the lowest price is called the floor price, and the highest price is called the cap price. Once the price and lot size has been selected, the total amount is arrested by banks in the investor's account until the allotment is done.
Allotment of shares:
The last and final step is the allotment of shares. Once all the above-mentioned steps have been followed and the bidding is completed, the shares will be allotted to investors. There are possibilities that you will get less than the shares you demanded. This situation can arise due to the excessive demand in the secondary market. In such cases, the banks will unblock the arrested amounts. But if an investor gets the full allotment of shares, he will receive a confirmatory allotment note (CAN) within 6 working days from the closure of the IPO. Now, he has to wait for the company's stock to get listed on the stock exchange.
Where can I find out about the upcoming IPO?
After going through all these steps to invest in IPOs you must be wondering where to find about upcoming IPOs. So here are two of the most viewed sites to get a glimpse into the upcoming IPO in India.
* Ipo watch provides a list of all the upcoming IPOs in India. It provides the name of the companies, their IPO size, and the expected dates.
* Ipo central shows about current IPOs, review of IPOs, upcoming IPOs with their company name, price range, and tentative dates.
Tips for investing in an IPO:
Let us roam around some tips that should be kept in mind before investing in an IPO.
- Deep research is required before investing. Search online about the company's present and past performance. Gain knowledge about the overall industry health. This is a crucial step in making a wise decision.
- As mentioned earlier, companies put a lot of details about them in their prospectus. So at least go through them once before making a decision.
- Always check about the promoters of the companies. If the people associated with the company are sound, the possibilities of good performance are high.
- Companies associated with good stockbrokers and underwriters are good to invest in, so always select the best broker.
We hope that our efforts to put all the information regarding IPO together gave you valuable guidance on IPO investing. Just a bit of research, analysis, time, and patience will surely make you a successful investor in your life.
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