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.
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.