IPO, a short form of INITIAL PUBLIC OFFERINGS, is the procedure that private companies follow. And plan to go public and want the general public to invest in their company. These companies are then listed on an exchange after the IPO.
Introduction On How to Invest in an IPO
An Initial Public Offerings (IPO) is a procedure company follows to invite the public to invest in their company. New and existing companies issue IPO. Companies can offer IPO to their existing shareholders only and the other way round also where IPOs are open to all. An IPO allows raising funds from the public.
Companies issuing IPOs are not duty-bound to reimburse their shareholders’ payments because Initial Public Offerings are not from debts. The companies welcome the community to grow as an owner of the company just like them. Many steps are involved in the process of transferring from private to public.
Need for an IPO Investment for Beginner
IPO is a crucial decision a company takes. A company needs a vision and goal to achieve the shareholder’s trust, therefore leaving no choice for them other than investing. The main target of an IPO issuer is to raise money through borrowing with the help of Initial Public Offerings.
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Once bought the shares, the issuer gets the capital to invest, and the shareholder holds the ownership in the company. IPO is a good option for a beginner.
Process Steps That Companies Have To Go Through Before IPO
Before getting into the benefits of IPO investments, a beginner should know a company’s process before any IPO issue.
Step 1: Appoint professional help.
Once the decision to go public, a company needs to seek help from an expert. The expert can be an underwriter or an investment banker. The experts check all the financial territory of a company and are satisfied and sign an underwriting agreement with them. Agreement includes
- Particular of the deal
- Budget to be raised
- Particulars of securities that need to be issued
Step 2: Registration for IPO
It’s a crucial step. The company has to prepare a registration draft prospect known as Red Herring Prospectus (RHP). RHP submission is compulsory under the Companies Act.
Step 3: Authentication by SEBI
SEBI, the market regulator, verifies all disclosed facts of the company. When everything seems fair, they accept the application, and the company can announce the IPO issue date.
Step 4: Apply at the Stock Exchange.
The company can now apply on the stock exchange to circulate the IPO issue.
Step 5: Create a news
Companies create gossip around the IPO in public. Various marketing strategies and tactics are implemented to create a buzz in the market.
Step 6: Setting up the price
It is an important decision to make. Hence, the company needs to be calm and relaxed before declaring any price. Company avail two options to price the IPO in two ways – Fixed price IPO and Book Bidding offering. Either of two can be selected that increases the raise amount.
Step 7: Allocation of Shares
This is the final step of the process. After finalizing the Initial Public Offerings price, the company sits with its underwriting team and decides the number of shares allocated to shareholders.
An Initial Public Offerings investor should know these seven crucial steps before jumping into the pool.
How to Invest For Beginners?
The question arises of how profitable for a beginner to make his initial investment in an IPO. Following are the steps a beginner needs to follow.
Before any IPO application, a beginner should fulfill the following requirements:
- A beginner should have a Demat account opened with a bank. All shares are transferred in an electronic form in a Demat account of the holder.
- Having a Demat account is not enough investors require a trading account opened with the bank. The trading account should maintain a sufficient amount before applying for initial public offerings.
Steps that help you acquire IPO:
Step 1: Need an application form
You require an application form to fill out. This form can be your broker or a distributor a bank branch. If not, then the same form can be accessed online as well.
Step 2: Fill in your details.
Fill out the form with all your personal and bank details. Even the Demat details are an inclusion.
Step 3: Amount of investment
Your bank account should maintain the sufficient amount that you want to invest. According to the amount mentioned, the number of shares is allotted.
Step 4: Date of allotment
Shares will be allotted within ten days of the closing date.
Important Parameters To Look Upon Before Investing
Therefore, the application for an IPO is not rocket science. It’s a pre-primary task for a beginner. But there are some more steps required to be taken before investing.
- Before taking up the decision of investing, some grounds need to be taken care of. Before investing, do a thorough study of the company and stock market fundamentals. The company’s previous workings give an overall review of its capabilities and help to play a bet for the future.
- Along with studying the company and stock market fundamentals, follow the market trend. Know what the experts think of the IPO and accordingly take your decision. The market trend is also closely linked with the performance of an IPO. Markets can have a positive or negative impact on the IPO.
- The volume of the application received does play a key role in making decisions. If there are many applications, the oversubscription will result in fewer shares coming in hand. Therefore, keep a close look at the applications.
- Don’t invest in an IPO just because others are doing so; understand your needs and accordingly take your decision.
- Big companies issuing IPOs does not mean it’s always profit-making. Sometimes things do go the other way round. Therefore, do a thorough study of the particular IPO.
- Don’t be in hush-hush to make profits. Wait for the lock-in period to be over as before that traders are restricted to sell. After the lock-in period is over, traders can choose any option.
IPO is a good and risky option for a beginner to invest in. The risk in existing companies’ IPO is less than in the new ones. Despite the risks involved, IPOs do make money.
Studying stock market fundamentals can guide you to decide on the right path. Therefore, think and talk before investing. Sometimes two minds make better decisions.