What is IPO?

An initial public offering (IPO) is the procedure of releasing fresh shares of stock to the public for the first time in a private firm. A corporation can raise equity funding from the general public through an IPO.

Since there is often a share premium for present private investors, the transition from a private to a public firm can be a crucial period for private investors to completely realize rewards from their investment. Additionally, it enables public investors to take part in the sale. In this article, you'll go understand IPO meaning and how it works.

IPO: Meaning and Definition

Initial Public Offering, or IPO, is a unique process to convert a private company into a public company by issuing shares. The issuance of shares for the public allows the company to gather capital and an excellent opportunity for the general public to invest and earn returns on that investment.

Initially, a private company grows with its initial investors, founders, and stakeholders. When a company has achieved a specific goal where the management realises that they are stable enough to handle the SEC (Securities And Exchange Commission) regulations, grow and diversify using the general public's money, the company decides to offer an Initial Public Offering. Through this, the stake-holdership in the company is offered to the general public through shares.
 

How does an Initial Public Offering Work?

A company typically launches an IPO to raise money for the future, enable simple asset trading, increase equity capital, or monetize existing stakeholder investments. 

Institutional investors and the general public can assess the information in the prospectus about the initial sale of shares. The extensive prospectus contains comprehensive information about the proposed offerings. 

The listed stock is ready for trading after the IPO announcement. The stock exchange determines the minimum free float requirement for shares in absolute terms and as a percentage of the total share capital. 
 

Types of IPO

There are two types of IPOs. They are dependent upon the type of price generation the company or the underwriter is going for. These are of two types:

In Fixed Price Offering, the company decides on the price of the stocks initially, and any buyer or investor pays that amount per share to obtain the desired number of stocks.

In Book Building IPO, the company decides the price band of the forthcoming IPO where the floor price is the minimum, and the cap price is the maximum, and the bidding is done within this range. The price is set by the underwriter and the company's investors with surveys done on what would be the value of the share. The bids are made, and the selected investors get the stocks.

Why are IPOs generated? What is the need for launching IPOs?

There are only two reasons due to which a company issues an IPO. It is to raise capital or return money to the initial investors.

The company opens itself to public investors by releasing an IPO. The IPOs give them a greater domain for the amount of investment. They can raise much more money than they could ever raise by the private investors.

One other reason the company considers releasing an IPO in the future is that it attracts initial investors. The investors have an option to sell their stocks in the company and get a return on their initial investment. 

Advantages of an IPO

IPOs are a key formula to generate or raise capital. Here are some additional advantages that IPOs bring: 

●    An IPO enables the public to invest in a potential project or business. 
●    IPOs make acquiring companies simpler. 
●    They boost visibility and reputation.
●    They facilitate increased transparency due to the requirement for quarterly reporting.
●    Companies that launch an IPO are granted more conducive credit borrowing conditions than any other private company. 

Initial Public Offering (IPO) is currently one of the most popular investment models for people. Anyone with sufficient knowledge of the stocks and their in-depth operations can garner huge profits from the stock market.
 

Disadvantages of an IPO

Before investing in an IPO, investors should consider a few important factors:

1. Higher Costs: IPOs can be expensive. Companies going public need to spend money on various things like regulatory compliance, hiring an underwriter, working with an investment bank, and paying for advertising to ensure the IPO process goes smoothly. These costs can add up quickly.

2. Reduced Control: Once a company goes public, it’s overseen by a board of directors, which answers to the shareholders, not just the CEO or founder. Even if the board lets a management team run the daily operations, it still has the power to make major decisions, including firing the CEO, even if that person is the founder.

Some companies avoid this loss of control by structuring their IPO to allow the founder to keep veto power over major decisions.
 

How to check for upcoming IPOs?

Investors interested in allocating their money to IPOs can stay updated about the upcoming IPOs through various means. These means include the following:

• They can check the stock exchange websites and get news about the upcoming IPOs. Many stock exchanges have a dedicated section of IPOs where desiring investors can get information about the upcoming IPOs. These websites, in various cases, also provide the IPO calendar and the IPO prospectus.
• Another mode is various websites on the internet. Those websites will provide you with  authentic news  under the segments such as "new ipos" or "ipo list."
• The third avenue is to look on the official website of aggregators, brokers, stock market information websites, blogs, and so on. Discount brokers like 5paisa.com.  provide the investors with complete information and analysis of the upcoming IPOs. You can check the IPO section on our website OR in our mobile trading app.

What is the IPO Timeline?

The process of applying for an IPO and getting it allocated to your name with various procedures in between is known as the IPO timeline. The process, also known as the IPO calendar, has the following subdivisions:

• Open/Close Date: These are the opening dates and closing dates of the bidding process in IPOs. Any desiring bidders can apply or bid between these days.
• Allotment Date: Allotment date is when the allotment status is announced to the public by the registrar of the IPO.
• Refund Date: The application amount is frozen, and you cannot withdraw the amount you used to apply for the IPO. Based on the IPO's allocation, the date on which the refund is initiated for the people who didn’t get the IPO, is known as the refund date.
• Credit to Demat Account Date: This is different for different companies, but this is when you receive the credit of the applied IPO shares in your Demat account before the listing date of the shares of the company.
• Listing Date: It is also known as IPO listing.This is when the shares of a company are officially listed on the respective stock exchanges (secondary market) and available for trading.

IPO Glossary

• Issuer: Issuer of an IPO is the company that issues the stocks to raise capital.
• Underwriter:  Underwriter is a banker, financial institution, or broker who helps the company underwrite the IPO. These act as a broker medium between the public and the issuer. 
• DRHP: It stands for Draft Red Herring Prospectus, also known as the offer document. It is a preliminary registration document prepared by the Investment bankers for the IPO issuing company in case of a book built issue. the document contains the financial and operational information of the company along with a few other information like why it is attempting to raise money. 
• RHP: Red Herring Prospectus is the preliminary registration document that is filed with SEBI in a case of book built issue. It doesn’t contain the number of shares or the price of the shares being offered in an issue.  
• Price Band: A price band is basically the lower price and the upper price per share with which the company would go public. 
• Issue Size: The Issue size in an IPO means the number of shares issues multiplied by the amount of each share. 
• Under Subscription: This is a condition when the number of shares applied by the public is less than the number of shares issued by the company. 
• Oversubscription: This is a condition when a company receives more applications than the number of shares being offered by the public.

Things to remember while investing in an IPO

Investing in an IPO is usually a beneficial option, but before investing, you should keep the following things in mind:

1. Study the company, its background, financials, future aspects before you invest in the IPO.
2. Note the IPO locking Period. The locking period is a duration in which you cannot sell or trade the stocks after an initial investment.
3. Always plan an investment strategy before investing in any IPO.

How to Invest in an IPO

Now that you know what is IPO in stock market and have explored related questions, it's time to learn how to invest in one.

1. Research the Company: Before investing, learn about the company, its finances, and its future plans. Check the DRHP or Draft Red Herring Prospectus and other details to make a smart choice.

2. Open a Demat Account: To buy IPO shares, you need a Demat account to hold your shares digitally and a trading account to buy and sell them. You can open these with a stockbroker.

3. Apply for the IPO: When the IPO is open for subscription, apply through your broker’s platform or use the ASBA or Application Supported by Blocked Amount option through your bank. Decide how many shares you want and at what price.

4. Allotment and Listing: After the subscription ends, shares are allotted based on demand. If you get shares, they’ll be added to your Demat account. Then, once the shares are listed on the stock exchange, you can start trading them.