IPO Tips: Why do companies bring IPO, what things should be kept in mind before investing money?
There are many ways to invest in the stock market. Among these, IPO means Initial Public Offering. Sometimes IPOs give very good returns in a very short time. For example, Bajaj Housing Finance's IPO gave investors a listing gain of 114 percent. However, to invest in an IPO and get good returns from it, you have to understand some things. For example, what is IPO, why do companies bring it, and what happens by investing in it?
What is IPO and why does a company bring it?
Whenever a company wants to get listed in the stock market, it brings its IPO. There are some reasons for this. Many times the company needs capital to reduce its debt, continue its work, or expand the business. Since any company can take only a fixed amount of loan from banks, it raises money from the public by bringing IPO. In this, the company sells its shares and spends the money received from it on expanding the business.
What is the benefit of investing in an IPO?
By investing in an IPO, you become the owner of some part of the company. After the listing of the IPO, you can get good listing gains (IPO Investment Benefits), as has happened in the case of Bajaj Housing Finance and many other IPOs. Even if the stock rises after listing, you can still make profits (IPO Profits). You can buy and sell shares even after listing. Also, if the company distributes dividends in case of profit, you will get the benefit of that.
Are there risks in investing in an IPO?
The simple answer is yes. You must have often heard that investing in the stock market is subject to risks and IPO is also no exception to this. Investors made huge profits from Bajaj Housing Finance. But, there are also IPOs like fintech company Paytm, in which investors who invested money in the IPO suffered huge losses (IPO Investment Risk). Paytm had kept the price band of its IPO at Rs 2,080 to Rs 2,150 per share. But, it fell to Rs 1,586.25 on the day of listing.
How can you invest in an IPO?
To invest in an IPO, one has to open a demat or trading account. You can open an online account in any brokerage of your choice. Some documents like Aadhaar and PAN card are required for this. Also, bank details are required. Still, you can invest in any upcoming IPO. As soon as you apply for an IPO, that amount will be frozen in your account. This means that money will be deducted from your account only when you are allotted shares. Otherwise, you will get your money back one day.
What is the price band and lot size in IPO?
Price band and lot size are the most important parts of an IPO. Any IPO remains open for subscription for 3-5 days. The company decides a price band and you can invest accordingly. However, in this, you cannot buy 1 or 2 shares like in the secondary market. You have to buy the entire lot. For example, the price band of Bajaj Housing Finance's IPO was Rs 66 to Rs 70. The lot size of the IPO was 214 shares. This means that the investor has to buy at least 214 shares.
Vigilance is also necessary while investing in an IPO
Shares are sold in IPO in two ways. Firstly, the company issues fresh equity. This type of IPO is considered good because the capital received in it is used to expand the company's business. At the same time, in some IPOs, the existing shareholders exit by selling their stake, which is called Offer for Sale (OFS). If an IPO is only an Offer for Sale, then one needs to be especially cautious about it, because the company does not get any money in it.
What happens if there is less or more demand for IPO?
If a company brings an IPO and does not get a good response from investors, then it can withdraw its IPO. However, there is no specific rule about how much percent of the company's shares should be sold. At the same time, if there is a high demand for the IPO, then the shares are allotted as per the formula set by SEBI. In this, it is decided through a computerized lottery which investor will get the shares and who will not. For example, if an investor has applied for 5 lots, then he may get 1 or 2 lots. It is possible that an investor may not get even a single lot.
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