IPO (Initial Public Offering) has been a famed word in the dictionary of the stock traders and brokers for decades. In simple words, before an IPO a company is considered as private as the shareholders only include the founding members, family, friends, and the early investors. After an IPO, the company is public as now the shareholders also include the general public.
What is an IPO?
Why should you invest in an IPO?
How to invest in an IPO?
Steps to invest in an IPO online:
Key points before investing in an IPO
- Make sure you read the Red Herring Prospectus Thoroughly
- Understand the business
- Promoter Background and Management Team
- Potential of the company in the market
- Comparative analysis of the company
- Major Risk factor
What is an IPO?
Initial Public Offering is abbreviated as IPO. It is referred to the process through which a private corporation raises its capital by offering its shares to the public investors in a new stock issuance. It means it’s a transient state where the private company becomes public. It’s a crucial time for Venture investors, angel investors, and private investors to reap profits out of their investments while public investors are also allowed to make an offering.
Why should you invest in an IPO?
- IPO allows you to invest in a company at a relatively early stage.
- It allows you to get a deep insight into the company and the sector of the potential IPO prospect you’re planning to invest in. When the company shares are listed in the public domain, a high degree of disclosure of company affairs is required. It is to assure that the business is transparent and adhering to the requirements of a stock exchange.
- A company listing must produce a prospectus that offers up valuable information about the company.
- The upcoming fad is for the IPO to remain Founder-led. It is observed that founder-led IPOs tend to perform better than others.
How to invest in an IPO?
IPO application can be done via your bank account or any trading account. Securities and Exchange Board of India (SEBI) has made Application Supported by Blocked Amount (ASBA) mandatory for IPO bidding. In Application Supported by Blocked Amount (ASBA), the funds that are used to bid for the IPO are blocked into your account which means you are forbidden to use them until the IPO process is completed.
Steps to invest in an IPO online:
- Log in to your online internet banking account
- Go to the investments section, click on the IPO/e-IPO option
- Fill out your depository details and bank account details to complete the verification process
- After completing verification, you are redirected to a screen where it says ‘Invest in IPO’
- Select the IPO for which you want to bid.
- Enter the number of shares and the ‘bid price’ will be calculated accordingly.
- Read the ‘’Terms and Conditions’’ document carefully before you place your bid.
- Confirm and place your order.
- Now, relax and wait for your bidding to bear fruit!
Key points before investing in an IPO
Make sure you keep these 6 points in mind before investing in an ipo.
1. Make sure you read the Red Herring Prospectus Thoroughly
DRHP (Draft Red Herring Prospectus) is filed by the company in SEBI before releasing an IPO. DHRP gives a breakdown of where they are planning to spend the money.
2. Understand the business
One should be familiar with the niche of the business they are investing in. Once the business, hunting for prospects should be the next plan of action. Searching for companies with good prospects and the ability to take over the market makes all the difference for the investor.
3. Promoter Background and Management Team
An investor must always keep his eyes on who’s running the company and how is the company running? The person who leads the company and the management who runs the company are both pivotal when it comes to the growth of a company.
4. Potential of the company in the market
It is necessary to see how much the company can grow with its current standing and how it will be able to keep up with the market trends in the future. A company that performs well in fundraising during an IPO will be able to give high returns to its investors.
5. Comparative analysis of the company
It is necessary to do a comparative analysis of the company with the other companies in the same niche. Comparison of the financial numbers and valuations with its peer companies can provide valuable insight.
6. Major Risk factor
We must all bear in mind that not all IPO investments are likely to give exponential returns, some might fail as well. Risk factors can be found out through DRHP.
IPOs with good prospects are bound to give better returns with sufficient time. However, there are times when they may fail to do so due to unforeseen circumstances even if they had a solid core. Thus, one must be prepared with risk management stratagems and have keen insight into the business they’re investing in. One can develop this with sufficient research in the desired niche. IPOs are generally a lucrative investment when it fits in with the trend or is a trendsetter company.
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