What is an IPO?

An Initial Public Offering (IPO) is the process through which a private company becomes public by offering its shares to investors for the first time in the stock market. This allows companies to raise capital from investors in exchange for ownership stakes. For individuals, IPOs offer an opportunity to invest in potentially growing businesses at the start of their public journey.

IPO Meaning and Definition

An IPO is when a private company sells its shares to the public for the first time to raise funds for business growth, expansion into new markets, launching new products, or other opportunities to strengthen its operations and competitiveness.

Before an IPO, a company is privately held by a small group of founders, investors, or employees. Once a company goes public, its shares are listed on a stock exchange, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) in India, making them available for trading by the public.

Types of IPOs

When a firm goes public, it has two principal forms of Initial Public Offerings (IPO):

Fixed Price Offering: In this, the company fixes a particular price for every share prior to the opening of the IPO for subscription. This price is clearly mentioned in the offer document. Investors know exactly how much they need to pay when applying. The payment has to be made in full at the time of the application. This type is simple for beginners, but the demand for shares is only known after the issue closes.

Book Building Offering: In this, rather than fixing a particular price, the company declares a price band, including a floor price (the lowest price) and a cap price (the highest price). The investors can tender bids for the quantity of shares they wish and at the price at which they are willing to pay within that zone. Once the bidding period ends, the final price is decided based on demand. This method is more flexible and gives the company a better chance to find the correct market value for its shares.

Also Read: Types of IPO with Example

How does an IPO Work?

The process of launching an IPO is detailed and happens in several steps. The steps are:

Hire an Underwriter: The company appoints investment banks or financial institutions to act as underwriters. They manage the IPO process, give advice, and help decide the price and number of shares to be issued.

Get Ready the Prospectus: A comprehensive document referred to as the Draft Red Herring Prospectus (DRHP) is ready. It has company information, past performances, future strategies, and possible risks to investors.

SEBI Approval: The DRHP is actually submitted to the Securities and Exchange Board of India (SEBI) for checking. SEBI makes sure all regulations are adhered to and that investors receive complete and fair information.

Apply for Listing on Stock Exchange: The company makes a request to list its stocks in one or more stock exchanges, like NSE or BSE.

Marketing and Roadshows: Company representatives travel to different cities and meet potential investors to generate interest.

Pricing the Shares: The share price is decided using either the fixed price or the book-building method.

Bidding Period: Investors can apply for shares during the IPO subscription period, which usually lasts 3–5 days.

Allotment and Listing: Shares are allotted depending upon the demand and availability. Lastly, the shares of the company begin to trade in the stock exchange, and investors are allowed to buy or sell them freely.

Terms Associated With an IPO

Understanding key terms related to an IPO can help you make informed decisions when considering an investment. Here are some essential terms associated with IPOs:

1. Issuing Company

This is the company that’s going public by offering its shares to the public for the first time. It’s also known as the “issuer.

2. Underwriter

An underwriter is usually an investment bank or financial institution that helps the issuing company set the IPO price, markets the shares to investors, and ensures a smooth process for launching the IPO.

3. Red Herring Prospectus (RHP)

This is a preliminary document filed by the issuing company with SEBI (Securities and Exchange Board of India). It contains details about the company, its financials, and risks involved, helping investors understand the offering before making a decision.

4. Price Band

The price band is the range within which investors can place bids for shares. The final price is determined within this range, depending on demand.

5. Lot Size

Lot size refers to the minimum number of shares an investor must bid for when applying for an IPO. Investors cannot buy less than the specified lot size.

6. Book Building Process

In a book-building IPO, investors place bids for shares within a specified price range. The underwriter collects these bids and determines the final issue price based on demand. If demand is high, the price may be set at the upper end of the range.

7. Cut-Off Price

For retail investors, the cut-off price option allows them to apply without specifying a particular price within the price band. If they choose the cut-off price, they agree to pay the final price decided during book building.

8. Allotment

Allotment is the process of allocating shares to investors once the IPO bidding period ends. Shares are distributed based on demand and the type of investor (retail, institutional, or high-net-worth individual).

9. Oversubscription

Oversubscription occurs when the demand for an IPO exceeds the number of shares offered. In this case, shares may be allocated on a pro-rata basis or through a lottery system.

10. Listing

Once the shares are allotted, they are listed on a stock exchange, such as the NSE or BSE, where investors can buy and sell them in the open market.

IPO Eligibility Criteria

Before it can issue an IPO, the company must meet certain regulatory and financial challenges in order to offer a seamless and compliant public issue.

Has to be brought under the Companies Act, 2013.
Must have a history of profitability, positive net worth, and minimum net tangible assets.
Must comply with SEBI regulations, including disclosure, governance, and investor protection norms.
Appoint key intermediaries like investment bankers, underwriters, and legal advisors.
Conduct financial and legal due diligence to ensure compliance.
Prepare and submit a Draft Red Herring Prospectus (DRHP) to SEBI for approval.
Obtain Board and shareholder approval through a special resolution.
Decide the IPO pricing with the lead manager based on market conditions.
Run marketing and advertising campaigns to generate investor interest.
Sign a listing agreement with the stock exchanges.
Complete share allotment and refund of excess application money.
List the shares on stock exchanges for public trading.

Read in Details: How to Meet the IPO Eligibility Criteria?

Key Factors That Impact IPO Performance

Before investing in an IPO, it is important to understand the key factors that affect how the stock performs after listing. This helps you make better investment decisions:

Company Fundamentals: A company’s financial strength, business model, and growth prospects shape its long-term success.

Market Conditions: The overall market environment and sector trends at the time of listing influence demand and pricing.

Lock-Up Period: Insiders and early investors are restricted from selling shares immediately after the IPO, limiting supply and helping stabilise prices.

Waiting Period: The period from the issue of the IPO to when shares can be traded impacts liquidity and investment timing.

Flipping: Some investors sell stocks immediately for short-term gains, which causes price volatility and reflects market sentiment.

Why does a company offer an IPO?

Companies choose to become public for many reasons. Some of them are:

Raising Growth Capital: The primary purpose is to raise large amounts of money to fund new ventures, expand the current operations, or diversify into new markets.

Debt Repayment: IPO funds can be used to clear loans, reducing interest costs.

Increasing Brand Visibility: Being listed on the stock exchange increases trust among customers, suppliers, and investors.

Exit Opportunity for Early Investors: Founders and early investors can sell part of their stake to realise profits.

Funding Research and Acquisitions: Companies can invest in innovation or buy other businesses.

Improving Liquidity: Once listed, the shares can be easily bought or sold, making them liquid assets for shareholders.

Advantages and Disadvantages of Investing in IPO

Advantages of an IPO	Disadvantages of an IPO
Access to Capital: Provides substantial funds for expansion, new projects, or markets.	High Costs: Involves heavy expenses for underwriting, legal, and compliance requirements.
Increased Recognition: Enhances visibility, boosts brand reputation and investor trust.	Loss of Control: Ownership is diluted; founders may lose influence over decisions.
Exit Opportunity: Allows early investors, founders, and employees to monetise holdings.	Market Pressure: Constant pressure to maintain stock performance and meet expectations.
M&A Opportunities: Public shares can be used for mergers, acquisitions, or partnerships.	Share Price Volatility: Valuation may fluctuate due to market sentiment.
Debt Reduction: IPO proceeds can repay loans, improving financial strength.	Regulatory Scrutiny: Subject to tighter oversight and transparency requirements.

Read in Detail: Advantages and Disadvantages of IPO for Investors

Important Things to Know Before Investing in an IPO

IPO investing can prove to be a thrilling opportunity, but one should be well-prepared beforehand before parting with their money.

Research the Company: Know its past, financials, and future growth prospects.
Read the Prospectus: Know the business model, risks involved, and past performance.
Know the Price of the IPO: Know whether it’s a fixed price or book-building issue.
Check the Price Band: Observe the range and decide your limit of investment.
Understand the Lock-in Period: You may not be able to sell shares as early as allotment.
Ensure Account Readiness: Check your Demat, trading, and bank accounts are active and inter-linked.
Define Your Investment Strategy: Clearly state your financial goals and know your risk appetite.
Be Aware of Risks: IPOs are subject to market risks; think about possible gains and losses.
Be Patient and Informed: Do not hurry; choose research and planning.

Read in Detail: Things You Should Know Before Investing in IPO

How to Invest in IPO with Findoc

To invest in an IPO on Findoc, follow these steps:

Ensure that you have an active Demat and trading account with Findoc. If not, you can easily open Demat and trading account online to get started.
Log in to the online platform or mobile application of Findoc.
Proceed to the IPO section and select the IPO in which you want to invest.
Verify such crucial details as price band, issue dates, and lot size.
Enter the number of lots you wish to apply for.
Choose your bidding price within the allowed range.
Complete application via ASBA or UPI for pay.
After submission, track allotment status on the platform after the closure of the IPO.

Now that you understand what an IPO is and how it works, why not take the next step and apply for IPO opportunities? It’s your chance to be part of a company’s growth story right from the start of its public journey

Frequently Asked Questions

1. What is the full form of IPO in the stock market?

IPO is the abbreviation for Initial Public Offering. It is the method through which a private firm issues its shares to the public for the first time to obtain capital and be listed in the public markets.

2. How does an IPO work?

In an IPO, a company offers shares to the public at a fixed or book-built price. Subscribers apply over a subscription period, and on allotment, the shares are floated on the stock exchange for public trading.

3. Are IPOs a good investment option?

IPOs can present opportunities for growth in case the company has favourable fundamentals and market potential. They do present risks because of market fluctuation. Investors need to research carefully before opting to participate.

4. Is every company eligible to launch an IPO?

No, only those companies that fulfil regulatory specifications such as minimum profitability, net worth, and disclosure norms prescribed by market regulators can issue an IPO. It keeps investors safe from false claims and ensures transparency.

5. When does an IPO get listed on the stock market?

An IPO is usually listed on the stock market a few days after the allotment period is over. The date is notified in advance by the company and the exchange.

6. Who can invest in an IPO?

Any admissible Indian resident, NRI, or eligible foreign investor with an active Demat and trading account, valid PAN, and fulfilled KYC can invest in an IPO during the application time.