IPO (Initial Public Offering)

Investing in an IPO, Initial Public Offering is undoubtedly a smart choice. The profitable returns you can earn from an IPO are promising. But you must understand the concept of IPO right before investing in one. In this article, we have covered everything there is to know about IPO – from its definition, process, to benefits.

What is IPO?

IPO, Initial Public Offering is a process where a privately held company becomes a public company by offering its shares to the public for the first time. An IPO is initiated by a company to raise capital from public investors, facilitate easy trade and increase liquidity, and monetize the investments made by the existing shareholders.
All investors can access the details of an IPO from the prospects issued by the company. Prospects is an extensively detailed document that holds all the information about the proposed offering. After the company goes public with its shares, you can find their shares listed and available for trading in the open market.

How does an IPO process take place?

Before a company comes up with its IPO, it is considered to be a privately held company. Having a limited number of shareholders – founders, family, and professional investors.
As the company grows and reaches a stage of maturity where it is ready to qualify the criteria set by the SEBI for having an IPO and can provide benefit to its shareholders, it can prepare to go public.
Moving from private to public is a big step for both the company and its shareholders. With the IPO, the company can draw in funds from public investors and work towards expansion. Plus, having your company listed at the stock exchange adds credibility to your company name. This makes the standing of your company transparent and also helps to draw better investors.
When a company initiates an IPO, its shareholders go from being private to public. And the price of their privately held shares changes to the public trading price, which favors the private stakeholders. The private shareholders can either sell or retain their shares on the launch of the IPO. Public investors can also then hold shares.

What are the eligibility norms to invest in an IPO?

Any adult capable of engaging in a legal contract can invest in an IPO. However, there are a set of edibility norms which investors need to meet; they are as follows:
Any individual interested in buying shares of an IPO must hold a PAN Card issued by the Income Tax Department to invest.
The individual must hold a valid Demat account to make trades.
Having a trading account is not compulsory, as the DEMAT Account serves all-purpose. However, if the individual is looking to sell his shares, having a trading account is necessary.
It is usually advisable to open a trading account along with a Demat account for smooth trading.

Read more about the document requirements to open a Demat Account here.

Benefits of investing in an IPO

Start on early – With IPOs, you get an opportunity to start investing in high growth potential companies from the ground level. Putting you in a favourable position to gains reasonable returns efficiently
Meet your long term goals – IPOs are equity-linked investments. This means you are likely to earn higher returns in the longer run. Which helps you meet your long-term financial goal better.
Absolute transparency – When you invest in an IPO, the company’s price per share is mentioned in its prospectus. All investors have the same access to price. This may not be the case post-IPO as the share price will largely depend on the market rate and your broker.
Invest small. Earn big – IPO share prices are usually low as the company launches the IPO at a discount offer. Investing during the IPO window is beneficial. After that, the price is expected to rise, and you might not be able to buy the shares.