How Does An IPO Work?

An Initial Public Offering (IPO) is an opportunity in the primary market for a public investor and can be a valuable investment to realize considerable gains with the company’s growth. IPOs are not available all the time to make investments as every company cannot afford to issue an IPO. Therefore, most of the time, due to the rush of investors, IPOs are oversubscribed. 

  • On the first day of trade on the stock exchange, heavy demand for IPO shares is expected. You can sell your IPO shares using your trading account to make short-term profits. 
  • For long-term gains, you can hold your lot, and if the company grows well and its stock value rises, it may pay you dividends in a proportion of the shares you bought. 

About IPOs

  • An IPO is an offer from a company to buy its shares in exchange for capital for the first time in the primary market. 
  • Through IPO, a private company offers its shares to the public for the first time. And its ownership changes from private to a public company as the ownership has been disseminated to the masses. Every shareholder is treated as the owner of the company.

How an IPO works

 

  • IPO shares are available in lots only and not individually. For example, if shares are available in lots of 15 shares, you need to bid in multiples of 15. 
  • An IPO application window is usually open for five days. The allotment can take up to 21 days. 
  • During these five days, you need to bid to buy shares in an IPO. If the company accepts your bid, you will get shares. If you could not get the allotment of shares due to oversubscription, your money will be refunded to you.
  • Most companies make a public presence through IPO to raise money, but it is not the only reason. There are other benefits also mentioned below: 
  • Increased Credibility: When a company gets listed on the stock exchange, it is a positive thing to increase a company’s credibility as the company is going to be accountable to its thousands of shareholders. 
  • The Exit Route: IPO may be used as an exit route for private investors. They may want to sell off their shares to make huge profits. 
  • Increased Negotiating Power: An online IPO is an opportunity for the company that supports it in negotiating loan terms and interest rates, and it can have capital at a lower interest rate. 
  • Merger and Acquisition Offer: Listed companies receive more offers for mergers or acquisitions intended to make part of the trade deal.

Therefore, before applying for an IPO, gauge ‘red herring’ prospectus’ very well to know the exact reason behind issuing an IPO. 

A ‘red herring’ prospectus is released by the IPO issuing company to provide information on the number of shares, the price band, shares to be offered to different categories of investors, its promoters, the purpose of the IPO issue, etc. You will get the details of the company’s past performance also there.

IPO Application Process

During the five days when an IPO is open to receive bids, retail investors can bid through banks and brokerages. You should have a valid PAN card and a Demat account to make an online application for the IPO.

You can go to the authorized banks to make an offline application for IPO. Or just log in to your Demat account and make an IPO application online at the comfort of your home.

  1. Login to your Demat Account at the stockbroker’s portal. 
  2. Make a bid for shares in the multiples of available lots. Otherwise, your application will be rejected.
  3. Fill in the details required and submit the application.
  4. Under the ASBA (Application Supported by Blocked Amount) system, our bank will set aside the funds as per the bid you made for the IPO. This amount will be blocked till you get the allotment. Once the company allotted you the shares in your Demat account, the money will be transferred to them.

When you get the allotment of stocks you bid for, they will be credited automatically to your Demat account. If you do not get the allotment, your money will be refunded to your bank account. 

Why choose to bid online?

A few reasons to opt for online bidding are – 

  • The offline process involves intensive paperwork that is somewhat complicated.
  • The online process is less time-consuming, convenient, simple, and a matter of a few minutes.
  • After allotment, you will get shares automatically in your Demat account.
  • In case you do not get an allotment, the blocked funds will be refunded instantly. 

The Bottom Line

Investors are informed that not all IPOs have a successful story. In 2012, Samvardhana Motherson’s IPO was undersubscribed with only 23% shares initially. 

Therefore, if you pick the right IPO based on an analysis of the company’s prospects, you can stand high to make huge returns on your investment. Spot the right IPO carefully.