IPO or initial public offering is when the shares of a private company are opened up to the public for the very first time. It is the first sale of the company’s stock to the public to raise funds or capital. IPOs are very attractive for investors as there is a high chance of the stock price multiplying from its initial offer.
There are several reasons for a company to go public. Primarily, a company decides to go public to raise more capital or funds to fuel its growth. A company can raise its brand and market value by going public. Stocks can be used for mergers and acquisitions instead of cash and also for retaining talent in an organisation, as they provide liquidity to the company.
How to buy IPO in India?
The first and foremost step is to understand the underlying company before applying to an IPO. The best way is to be informed about a company’s performance in the past, its aspirations in the future, how it plans to invest the funds raised through the IPO to decide if it is a viable option for your investment horizon.
Below are the steps to follow to invest in an IPO in India:
- Choose the right company’s IPO for investment. Gain thorough knowledge about the prospective company by researching its prospectus on the Securities and Exchange Board of India’s (SEBI) website. Understand the company’s business plan, key strengths, performance to date, and purpose to decide wisely.
- The next step is to arrange for the funding. It is advisable not to use up your savings for this process. Instead, utilise disposable funds or investments set aside to invest in IPOs safely. If you do not have funds, several nationalised banks and private banks like ICICI, HDFC, and popular stockbrokers such as Angel One, offer the facility to apply for loans to invest in IPOs online.
- The next prerequisite is to open a Demat cum trading account. A Demat account facilitates the buying and selling of stock online. While you can open a Demat account through any of the brokerage houses or discount brokers, the facility to invest in IPOs is not offered by discount brokerage firms. You can open a Demat account online with Angel One by following the steps given here.
- To apply through your trading account, you need to understand ASBA (Application Supported by Blocked Amount), which is an application that allows banks to block the money in your account at the time of placing bids for IPOs. To invest in an IPO, along with the details of the IPO, bid number, lot size you want to invest, you must agree to block funds for such an investment, which will be used on allocation. ASBA also eliminates the need to apply via demand drafts, and with the use of a Demat account number, bank account number and PAN number, any investor can apply online.
- Bidding is the next step to be followed. A minimum number of shares, as specified in the company’s prospectus, need to be applied in the set bid price range. The lowest price is known as the floor price, and the highest price is called the cap price. Once the price is selected, this amount gets blocked until the allotment of the shares.
- Once the bidding is completed, depending on the investor’s reaction to the IPO, you will be allotted the shares. One thing to keep in mind is, there are possibilities that you might get less than the number of shares asked for or, in some cases, none at all. Such instances arise due to the massive demand in the market. When such incidents occur, the bank unblocks your bid money. However, if you get the full allotment of shares, you’ll be issued with a Confirmatory Allotment Note (CAN) within 6 working days after closure of the IPO, and the next process is to wait for the listing of stocks on the stock exchange.
IPOs give investors an early bird opportunity to invest in good quality stocks that were not open to the public before. IPOs offer avenues to investors to gain substantial returns in a short period. Read more about investing in an IPO here.