IPO for Beginners – Guidelines for Beginners Investing in IPO

Initial Public Offerings (IPO) are like grand openings for companies, inviting you to become a shareholder. It’s where companies launch their stocks to the public for the first time. If you’re a beginner in the investing world, understanding IPOs is your backstage pass to witnessing a company’s debut on the stock market. In this article, learn everything about an IPO.

What Is an Initial Public Offering?

An Initial Public Offering is the process through which a privately held company becomes a publicly traded company by issuing shares of its stock to the general public for the first time. In essence, an IPO is the first sale of a company’s stock to outside investors on a stock exchange. This significant financial event allows the company to raise capital by selling ownership stakes to public investors.

How Does an IPO Work? 

IPO is a process that allows a company to issue its shares to the market and raise capital. Investors can buy these shares, allowing them to own a piece of the company. Issuing an IPO involves several steps, as follows: 

1. Preparation: Before going public, the company works with investment banks, legal teams, and auditors to prepare its financial statements, business plans, and regulatory filings. A prospectus is created, which provides detailed information about the company’s operations, risks, and financial health.
2. Selection of underwriter: The company chooses an investment bank as an underwriter to help determine the price of the IPO. The investment bank buys the IPO shares from the company to sell to investors. 
3. Regulatory approval: The company submits its IPO registration statement to the relevant regulatory authorities, such as the Securities and Exchange Board of India (SEBI). The authority reviews the documents for compliance with securities laws and investor protections.
4. Advertising: The company, along with its underwriters, conducts a roadshow to market the IPO to institutional investors. During the roadshow, management presents the company’s financials and growth prospects to generate interest among potential investors.
5. Pricing: The offering price is set based on investor demand, market conditions, and the company’s valuation. The goal is to find a balance between raising capital for the company and providing an attractive price for investors.
6. Allocation: Shares are allocated to institutional investors, retail investors, and other interested parties based on their orders and demand. Some shares may be reserved for company insiders.
7. Market debut: On the day of the IPO, the company’s shares begin trading on a stock exchange. Investors can buy and sell the shares on the open market.
8. Post-IPO reporting: As a publicly traded company, the issuer must comply with ongoing reporting requirements, including regular financial disclosures and annual reports, to keep shareholders informed.

Investing in an IPO: Good or Bad?

Investing in an IPO has both pros and cons. IPO investments can offer an excellent opportunity to invest in emerging companies with significant growth potential. Being an early investor can allow you to participate in a company’s early growth stages, potentially resulting in substantial returns. IPOs often involve companies operating in innovative and disruptive industries. Investing in these companies can provide exposure to groundbreaking technologies and business models. 

On the flip side, IPOs can be highly speculative and risky. Many newly public companies may have limited operating histories and unproven business models. The stock price can be volatile, leading to potential losses. Investors must thoroughly research before investing in any company to understand its business and growth potential. 

Guidelines Before Investing in an IPO 

• Know yourself: It is extremely important for you to understand your investment objective. Make sure you do not borrow money to invest in an IPO. There is no guarantee of returns. In case of a loss, the money goes into the black hole. The loss should also be counted in the interest rate you must pay on the borrowed money. So, it is a wise decision to utilise your funds to invest.
• Analyse your risk appetite: The investment in an IPO can be very risky, and the markets are often unpredictable. So, take an honest look at how much risk you can bear. 
• Big backers need not mean big returns: Big names in the list of investment banks or major stock brokers should not tempt you to buy the IPO they are backing. They may have different calculation scales for their backing. You should abide by the company-provided facts and figures in the prospectus and focus on its growth potential before investing in an IPO.
• Don’t fall for the hype: Remember that the company which is going public along with its investment banks have put a lot of money into the process of IPO. They will not miss an opportunity to make it look like a piece of hot cake in demand. Do your research; get objective information from the official site of the stock exchanges.
• Wait till the lock-in period is over to buy IPO stocks: The lock-in period is the time period which restricts the people who have received pre-IPO stocks from selling their shares. If you can wait, you can analyse the stock’s profitability. You can prevent falling victim to early volatility.
• Market trends and IPO performance are related: The market trend depends on various factors and involves stocks from various sectors. They follow the stock market trend, but they do not lead it. A fundamentally strong IPO is bound to do well in the bullish trends of the market. It is a sure-shot way to make quick money.
• Open a Demat account: A Demat account is mandatory to invest in shares. Demat account is where the share certificates, government securities, mutual funds and any such financial instruments are deposited in electronic form. Without a Demat account, you cannot own any shares or trade in the stock market. You can open a Demat account with a trusted stock broker like Angel One.

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