It is quite a common understanding that investing your money is the pathway to build wealth. While there are several means to invest your money, the stock (with its risks) has been found to be the most rewarding consistently over several years. You can invest in several avenues like equity stocks, equity mutual funds, debt mutual funds, bonds, and ETFs.
With a variety of investment options available in the stock market, it factors down to your risk appetite and your investment capabilities. Based on your financial health, you can decide on the amount of capital you can afford to invest in the stock market. All of these options have a different amount of risk associated with them. So, understand your risk appetite and the capital you can afford to make an informed investment decision. One of the most popular methods of investment that many follow is the IPO. Let’s take a look at what an IPO is, the benefits of buying an IPO, and how you can invest in an IPO offered by a certain company.
What is an IPO?
An IPO (Initial Public Offering) is an event when a company publicizes its shares. In simple words, an IPO is when the public is allowed to invest in a certain private company. Initially, before the announcement of an IPO, the shareholders of the company would be the founders, angel investors, and the venture capitals including a few of the employees depending on the company policies. The number of shares allotted to each of these individuals may vary depending on factors like the capital they have invested in the company, their expertise, and the value they bring to the table.
Once the company decides to launch an IPO, the shares of the company are made public thereby allowing all investors to buy shares in the company based on their financial capabilities. The company can announce an IPO even after it is listed on the stock market indices. Hence, a company can have as many IPOs as they would require.
Why do companies announce an IPO?
You might be confused as to why private companies decide to make their shares public. There are several reasons why companies decide to launch an IPO. Here are a few of them.
For public awareness
IPOs are usually announced on many channels including the stock market window on trading platforms. Such an increased exposure to the public would not only increase awareness of the company but also gains the interest of many investors. Especially right before the day of the IPO, the company gains plenty of publicity.
Another key reason why several companies launch an IPO is to pay back the capital owed to the investors and the venture capitalists. Once a company releases an IPO, the sale of stocks increases during which the venture capitalists and investors find an opportunity to reap their returns. As a result, they sell their stocks in the company and exit the board.
To raise capital
Typically, one of the main reasons why companies decide to launch an IPO is to raise capital. In many cases, the company might decide to expand or even open franchisees and expand their geographic influence. More often than not, this would incur an increased expense in operations. In some cases, the company may even have existing debts that they may want to resolve. During such times, an IPO can gather plenty of capital that would help the company dispute its debts.
What to look out for before buying an IPOs
Company’s potential in the market
An IPO helps companies raise plenty of capital thereby ultimately increasing their operational efficiency and their reach to potential customers and clients. In addition, with increased awareness about the company around the time of the launch of an IPO, many investors begin analyzing the company and are more likely to buy an IPO. So, ensure to analyze the potential of the company in its market to understand the potential of future performance of the company. Given that the company performs well after raising capital, you will be in a position to gain high returns on the investment you made during the company’s IPO.
Financial health of the company
More often than not, the stock price of a certain company drastically increases after the allotment of stocks in an IPO. However, not all companies follow the same trend. The stock price of some companies experiences a sharp fall after an IPO. So, understand the financial health of the company before buying an IPO.
While determining the valuation might be difficult, it is the most important factor to look out for before investing in an IPO. Understanding and analyzing the listing gains of a company does not provide an accurate insight into its valuation. So, compare the performance of the IPO stocks with its competitors to gain a basic understanding of its valuation.
How to buy an IPO share?
One of the most commonly asked queries is about how to buy IPO shares. Here is how to purchase an IPO share in two ways: through ASBA and through UPI. But first, it’s important to know that you would require these 3 accounts to buy an IPO share.
It is mandatory to have a Demat account to invest in an IPO share offered by a company as it stores your shares in an electronic form.
You can open your trading account with any brokerage online by following a few simple steps. This account will allow you to buy IPO shares online.
Finally, to make the necessary payment for the IPO shares that you require, you will need a banking account to facilitate the payment. Once you ensure that you have a bank account, you can make your payment for the IPO shares either through UPI or ASBA (Application Supported by Blocked Amounts).
Now that you have a broader and clearer picture about investing in IPOs, it is essential to remember to perform a fundamental analysis before investing in an IPO. However, the first requirement is to ensure that you have an active Demat account. If you do not have one, Angel One can help you with the same in a hassle-free manner.