What Is an IPO and How Does It Important?

Seeking the first republic shares to invest? Think of an IPO as a company's grand opening. Once it go public, you can get the chance to own a piece of a company right.

The full form of IPOs is initial public offering. Shares of a privately held company are initially offered to the public through this process. This allows investors to step into the company’s ownership by shifting it from a privately owned company to a publicly traded company.

Types of IPO

There are primarily two IPO options for companies intending to go public: the fixed price offering and the book building offering. Both types hold unique characteristics that influence the pricing and availability of shares to investors.                                                                

1. Fixed Price Offering

The company settles on a particular price for the shares in advance of selling them in a fixed price offering. In this manner, investors are able to determine the precise cost at which they must apply for shares.

Key Features:

• The price of shares is predetermined and disclosed in the prospectus.
• Investors must pay the full amount when applying for the IPO.
• Suitable for investors who prefer transparency in pricing.

2. Book Building Offering

In a book building offering, the company provides a price range, known as a price band, rather than a set price. Afterwards, investors place bids within this range, and the final price will be decided by the market.

Key Features:

• The price band typically has a floor price (minimum) and a cap price (maximum).
• Investors can bid for shares at a price they’re comfortable with, within the range.
• The final issue price is determined after the bidding process, based on the highest demand.
  
  

How IPO Works

A company can raise capital and investors can gain ownership through an IPOs, which connect the primary and secondary markets. After the company is listed on a stock exchange, the secondary market allows investors to simply trade these shares, while the primary market is where shares were first distributed directly to investors.

Here is a step-by-step breakdown of the IPO process:

1. Decision to Go Public

The company made the choice to take advantage of the primary market to raise capital for investments by offering shares to the general public. In general, this decision is driven by an operational requirement to expand, reduce debt, or introduce new ideas.

2. Selection of Underwriters

The underwriters for an IPOs are financial institutions or investment banks which the company selects. The underwriters’ roles include measuring interest, determining a pricing range, and ensuring the offering’s success in the primary market.

3. Preparation of the Draft Red Herring Prospectus (DRHP)

Financial data, risks, and business plans are all included in a DRHP that the company creates. In order to ensure public transparency, this document must be filed to SEBI.

4. SEBI Review and Approval

The DRHP is reviewed by SEBI to make sure it follows all the rules. The IPOs will not proceed to the primary market subscription phase unless it has been approved.

5. Marketing the IPO

During this stage, companies attract potential investors through commercials, presentations, and roadshows. In the main market, this increases demand and draws in prospective purchasers.

6. Opening the IPO for Subscription

The public is able to participate in the IPO for a certain period of time. Many investors use the ASBA (Application Supported by Blocked Amount) mechanism to submit bids for shares, especially retail investors.

7. Allotment of Shares

After the subscription period, shares are distributed to investors. For retail investors, if the IPO is oversubscribed, the allotment is decided through a lottery system. Those not allotted shares will receive a refund.

8. Listing on Stock Exchanges

At the point that they are listed on a stock exchange, such as the NSE or BSE, the shares can be freely traded on the secondary market. As a result, shareholders may take advantage of supply and demand to purchase and sell shares at market prices.

Advantages of Investing in an IPO

• IPOs allow investors to buy shares at the ground level, often before the company achieves its full potential. If the company performs well in the long run, early investors can enjoy substantial returns.
• One of the most attractive aspects of IPOs is the possibility of listing gains, where the stock price rises significantly on the day it is listed on the stock exchange. For example, companies with high demand during the subscription phase often witness strong price surges on listing day.
• IPOs provide an opportunity to invest in sectors or industries that may not be represented in your existing portfolio. This diversification reduces overall investment risk by spreading it across different businesses and industries.

Interested in first public shares? learn how to invest in IPO and what requirement to prepare before get into the market: https://www.monetyra.com/monetyra-academy/stock-academy/what-is-an-ipo-in-india