Initial Public Offering (IPO): Meaning, Benefits, and Allotment Process

The Indian economy is booming after suffering multiple setbacks during the COVID-19 pandemic era, and people are eager to invest their money. An Initial Public Offering (IPO) is an excellent tool for investing in the stock market and also quite simple. But first, it’s important to know what an IPO means and why someone should invest in it.

What is an IPO?

IPO stands for Initial Public Offering. It is the process by which a company issues its shares to the general public for the first time.

New investors buy the shares and provide the company with the capital to grow and expand. People who buy shares in a company become co-owners.

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Benefits of IPO

IPOs have several advantages, both for the company and investors.

For owners:

Financing: Whether an established business or a new business, every business needs funds. And bank loans and angel investors only have a limited amount of money, which they demand with interest or keep a portion of the profits. An IPO is a simpler way to raise funds and list on the stock market.

Advertising: Every time a company goes public, it has to spend money on advertising and publicity. Otherwise, no one will know that your IPO no longer exists. This can improve the company’s reputation with customers, since being public gives it more credibility. And additional advertising will help the company sell its services better.

For investors:

More liquidity: Once a company goes public, investors can sell the company’s shares on the open market. This allows them to make profits without waiting for their shares to be repurchased.

Long-term benefits: Since the IPO investor who buys the shares does so directly from the company, he can make long-term benefits. All investors have access to the same red herring prospect, so if one thinks that the company’s earnings will be turbulent at first but will increase, it will later be successful in the long term, while other, more cautious investors will withdraw. . early.

Lower prices: In the early stages, a company’s share price is low because it has not been established. But once that happens, stock prices rise.

Disadvantages of IPO

Like most things, IPOs also have some disadvantages for both owners and investors.

For owners:

Regulatory requirements: Going public is no easy task. Due to the strict process, the company spends a lot of time and money following the SEBI guidelines.

Risk to ownership: Once a company goes public, it is open to investment by anyone. A competitor or someone with poor vision but enough money can make a hostile takeover. For example, Elon Musk and the purchase of Twitter. Additionally, the company’s founders and current owners will have to answer to mainstream stakeholders, which could lead to micromanagement and bias.

Leaks: The company has to publish important inside information about its operations, culture and revenue so that investors can make informed decisions. During this process, certain sensitive or unwanted information may also become public, putting the company at risk.

For investors:

Volatility: IPOs fluctuate a lot in the early days. Sometimes they can reduce their price and lower your investment.

Time-consuming: Investing in IPOs is more complex and time-consuming than simply buying shares of a company. IPOs have fixed quotas for different types of investors and there is a long allotment process for the general public to invest in the IPO.

IPO Allotment: How can you apply for an IPO?

While applying for an IPO is a fairly simple process, there are some prerequisites that everyone should be aware of.

To apply for any IPO, you need a demat account, a trading account and an active bank account with necessary funds.

Nowadays, there are many platforms like Zerodha club demat and trading accounts. You can choose any brokerage platform as per your convenience.

Also, make sure to read the company’s red herring prospectus on the SEBI website. A red herring prospectus contains information about operations, performance, past revenue, etc. of the company. Please read the prospectus carefully to make an informed decision about your IPO investment.

Once you have raised the capital and are ready to invest in the IPO, all you need to do is choose the lot size and bid. There are only a finite amount of shares you can buy, so keep that in mind.

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