What is an IPO, and why are Indians going crazy over it?

What is an IPO, and why are Indians going crazy over it?

What is an IPO

With back-to-back IPOs practically every week, 2021 appeared to be the initial public offerings (IPOs) year. According to BSE data, over 40 IPOs were launched last year.

An Initial Public Offering, or IPO, occurs whenever a company’s equity shares are initially made available to the public on the stock exchange, i.e. the sharemarket. By selling IPO shares, a business that is making it public receives money and resources. Retail investors, Qualified Institutional Buyers, and High Net-worth Investors each receive a portion of the stocks designated for them during the IPO market.

But what is this buzz about IPO, and why the Indian market is on the bull curve over them? Let’s discover those answers in this article.

What is an IPO?

Let us define an Initial Public Offering, or IPO, in very simple terms without delving into a wide range of complex intricacies. Let’s imagine Company X is doing very well and needs to raise funds to expand further.

The company can achieve this by offering new shares to the public if it meets all of the standards set out by the Securities and Exchange Board of India.

The financial intermediaries and the company would decide on a new capital issuance at a share price. As a result, after the company’s shares are offered to the market, the company’s shares will be listed, and it will become a full-fledged public company.

How does an IPO work?

  • In India, the Securities and Exchange Board of India (SEBI) oversees the whole process of investment through an initial public offering (IPO). A company that plans to issue stock through an initial public offering (IPO) must first register with SEBI. SEBI examines the documents presented before approving them. While waiting for clearance, the business develops a prospectus about their company.
  • Following approval, the business determines two things: the share price and the number of shares it intends to issue. Fixed-price and book-building IPOs are the two types of IPOs. In the first type, the business sets the share price ahead of time. In the second, the company provides you with a pricing range and then market bids within that range.
  • The corporation makes the stocks available to the market after agreeing on the form of offering. Investors then fill out applications expressing their desire to purchase the shares. The business then allots the shares after receiving subscriptions from the general public.
  • The final stage in this procedure is to list it on the share market. These shares are traded on a constant basis.

Why do companies offer IPOs?

One of the key motivations for a company to undertake an IPO is to raise money, as said before. Companies require funds at all stages of development, whether to build the infrastructure, operate, hire more people, or repay company debts.

Furthermore, current company shareholders or owners might earn additional money by selling their ownership in the company, particularly if they want to quit and seek a return on that investment.

Offering an IPO is a symbol of status for a business. It demonstrates that the company has earned the public’s respect and confidence.

How to invest in an IPO?

To participate in an IPO, you must apply to the market to purchase a ‘lot of shares.’ These IPOs normally have three days of public bidding, throughout trading hours.

If you wish to invest in an IPO easily, you’ll need a Demat account, a brokerage app like Zerodha or Groww, and a UPI ID.

The Unified Payment Interface (UPI) is a payment system that allows money to be transferred across payment applications such as Google Pay and PhonePe.

Trading platforms are among the easiest methods to keep track of IPOs and trade in them.

Things to look for before investing in an IPO?

Before investing, it is critical to do a thorough examination of the company. Aside from the company’s finances (at least two or three years), potential investors should consider the management’s competence and consistency, as well as the promoters’ trustworthiness.

A thorough peer review is essential: Investors should research and analyse the growth of other publicly traded companies in the industry, as well as their PE ratios (market price to earnings per share). Investors might decide to ignore the issue if the company seeks a greater valuation.

If somebody is serious about investing, they should look at current institutional investors in the business, such as venture capitalists, in addition to the companies involved and promoters’ track records.

Is it a smart idea to invest in an initial public offering (IPO)?

Every potential buyer wishes to understand if investing in an IPO is a smart idea; therefore, let’s talk about the honest response. An initial public offering (IPO) is a great way to get a piece of the action and participate in a company’s future. This is a great moment to invest in many business stocks with a bright future. Once a business has proven itself, its stock values will soar to new heights.

However, investing in an initial public offering (IPO) does not necessarily result in a positive outcome. When it comes to IPOs, risk and return are intimately connected. Occasionally the company you expected to succeed in crashes terribly, and you lose all of your hard-earned cash. To stay above water with your money, conduct a thorough review and analysis before opting to participate in an IPO.

Conclusion

Investments in initial public offerings (IPOs) are subject to market volatility and must be made after thorough deliberation. If you’re not sure about investing, talk to your financial advisor about the risks and advantages of that specific IPO.

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CA Mukesh Gupta
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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