What is an IPO and How to Invest in It?
Stock market is extremely non-predictive. It works a certain way for a while and within the next second, it becomes a whole task to even judge the market. You also must have thought about investing in the stock market at some point, but then you thought how to invest in the stock market?
Investing in the stock market is not at all difficult. You just need to learn a lot and always keep an eye on how the market is working.
There are 2 ways how you can invest in the stock market.
PRIMARY MARKET and SECONDARY MARKET
In Primary market, you invest through IPOs and in the secondary market, you directly invest in the listed shares.
Let us understand about IPO in an easy manner.
WHAT IS AN IPO?
When any company offers their shares publicly for the first time, then that is known as an IPO or Initial Public Offering. In this process, the company offers their shares to general public and this falls under primary market. In simpler terms, we can say that company collects funds through IPO and uses that fund in the betterment and movement of the company. In exchange, people gets the ownership in the company, which means when you buy the shares of any company, you get the ownership of that company worth the share that you have bought. A company can bring an IPO even more than once.
Generally companies launched IPO due to various reasons, let us discuss that in detail.
REASON FOR IPO
1. FOR EXPANSION:
When a company thinks that it is growing consistently and needs more exposure, means company wants to explore other cities as well, and for that, they need human force as well, so that is when a company launches its IPO. They can also apply for bank loans for more expansion but they would need to pay a certain amount of interest after a while, whereas if a company generates fund through an IPO, then neither do they need to return that money to anybody, nor do they need to pay any interest.
This was the benefit of the company. Now, let us talk about the benefits of the people buying an IPO. The investors who invests in an IPO, they get a certain amount of ownership in that company in exchange of those shares. In other words, if a company has launched certain shares for an IPO and you bought 2% of those shares, then you become the owner of 2% of that company. So, this is how, both the company and the investor gets the benefits.
2. TO REDUCE DEBTS
When a company is under a huge amount of debt, then also it releases an IPO. This way, company thinks of selling some shares of the company and settle the debts instead of taking a loan from the bank. This way, the company gets released from the debts and also gets new investors and those investors further gets to be the owner of the company.
3. TO LAUNCH NEW PRODUCTS OR SERVICES:
A company also launches their IPO when they want to launch some new products or services. Whenever a company launches any new products or services, they want its promotion to be done so it reaches more people, which is why company launches an IPO or Initial Public Offering.
TYPES OF IPO
IPO can be divided into 2 types because of its prices.
- Fix Price Issue or Fix Price IPO.
- Book Building IPO.
FIX PRICE IPO:
Before launching the IPO, the company discusses with the investment bank about the price of the IPO. The company decides the price of the IPO in the meeting with the investment bank. Any investor can subscribe to that IPO in that fixed price only.
BOOK BUILDING IPO:
In this, the company decides the price band of an IPO in meeting with the investment bank. An IPO gets launched when its price band gets finalized. After that, any investor can subscribe their bid from that price band. There are two types of price bands in the book building IPO.
- If the price of an IPO is less, it is called FLOOR PRICE.
- If the price of an IPO is more, it is called CAP PRICE.
The thing to be taken into consideration is that there is 20% of the difference in the CAP PRICE and the FLOOR PRICE of a book building IPO.
HOW TO INVEST IN AN IPO?
We have learned about what is an IPO and why does it get launched? Now, let us see how to invest in an IPO?
A company opens the IPO for the investors to buy for 3-10 days, which means an investor can buy an IPO between 3-10 days only. Some companies opens their IPO for 3 days only and some can open it for more than 3 days upon the choice.
You can go to the company’s site or contact the registered broker to invest in an IPO. Now that IPO is a fixed price issue, then you will have to apply for that IPO in that fixed price only and if the IPO is a book building IPO, then you will have to make your bid in that price band only.
When the IPO closes, the company does the allotment. In this process, the company allots the IPO to its investors and after the allotment of the IPO, the shares gets listed in the stock market. After getting listed in the stock market, buying and selling of the shares can take place in the secondary market. Till the time the shares doesn’t get listed in the stock market, you cannot sell them. When the shares get listed in the stock market, both stock exchange and money exchange can take place between the investors.
Once the share gets listed in the stock market, you can buy or sell the share according to the stock market timing.
THE WHOLE PROCESS TAKES PLACE UNDER SEBI
When a company plans to bring its IPO, it would have to follow the instructions of SEBI. They have to make sure to let them know about each and every detail about that IPO. A company gives a RED HERRING PROSPECTUS to SEBI.
That RED HERRING PROSPECTUS has:
- BUSINESS DETAILS
- CAPITAL STRUCTURE
- RISK FACTOR
- RISK STRATEGY
- PROMOTERS AND MANAGEMENT
- PAST FINANCIAL DATA
All these information. RED HERRING PROSPECTUS can be derived from SEBI’s (SECURITIES AND EXCHANGE BOARD OF INDIA) website. Every company has to follow the rules and regulations of SEBI.
THINGS TO TAKE CARE OF BEFORE INVESTING
Some things needs to be taken care of before investing:
Compare the company with other companies as well before investing.
Always make sure to read the RED HERRING PROSPECTUS of the company bringing IPO.
Always make sure to invest after taking all these things into consideration.
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