What Is An IPO And How To Invest In One?

Posted by AtishPatil on October 10th, 2019

When a company wants to raise funds, it can either seek loans or it can expand its capital base by issuing further equity shares. When a company wants to list on a stock exchange, it takes the IPO listing route.

An IPO or initial public offering is one way in which companies can raise funds for their growth and expansion. There are two types of IPO:

• New offer
• Offer for Sale

When a company makes a new offer, it issues fresh equity shares for new investors. However, in an Offer for Sale, any existing promoter dilutes their stake in the company by selling the shares to the public. For example, when the Government disinvests in any PSU, it goes through the Offer for Sale route to ensure the public invests.

An Initial Public Offering is a way for companies to list on stock exchanges. This works out to be beneficial for companies because the shares become highly liquid and can be traded at any point of time.

How to do IPO trading

Investing in an upcoming IPO is very simple and convenient. To make an investment in any latest IPO, you need a Demat account. The first step is to open a Demat account with any broker, either online or offline.  

You don’t necessarily need a trading account to make investments in IPO. However, if you want to sell the shares purchased in an IPO, you will need this account.  

The price of an IPO listing can be decided in two ways:

• Fixed price
• Book built

In a book-built issue, the company sets a floor price and a cap price, and the investors must bid for shares at a price. The cap price is set at 20% of the floor price. The exchanges do not interfere in IPO pricing. The order book keeps getting built every day and the issue price depends on which price gets maximum bids. The IPO allotment is done after considering the bids received.

Investing in an IPO online:

You can invest in Initial Public Offering online. For this, you will need to fill up the form online through your Demat account. It is better to approach your broker in case of any problems. Most brokers automatically populate details already in the IPO form which ends up saving a lot of time.

Investing in an IPO offline:

You can also fill a form offline and submit it to your broker. The broker will submit it to the issue managers. This application will be counted for the purpose of allotment.

How is IPO allotment done?

IPO listing allotment depends on the number of bids the issue receives. There are different categories of investors and each category has certain conditions like minimum and maximum investment, reservation for certain number of shares in IPO etc.  

The issue can be:

Oversubscribed:

This means the company has received more bids than the number of shares it is issuing. The IPO allotments depends on the bid, the bid price as well as the category of the investor. It is possible that one category may be oversubscribed and not all bids get shares. Another category may be undersubscribed, and all investors will receive the shares they applied for.

Undersubscribed:

This means lesser bids have been received than the shares offered. The company generally allots all the shares bid for in this case. If the company has opted for underwriting, the underwriter will purchase the balance shares.

At par subscription:

This means all the shares offered have been subscribed. This IPO status means all bids will get the shares they bid for.

How to pay for this investment?

Earlier, investors had to submit cheques for their investment in an IPO. The amount would be debited, and the final amount would depend on allotment. Any excess would be credited to the bank account. However, recently, SEBI has shifted to a process called Application Supported by Blocked Amount (ASBA) in which an amount equal to the bid amount is blocked in the bank account of the investor. If there is any allotment, this blocked amount will get released to the company. Otherwise, it becomes available for use for the investor.