What Is an IPO, and How Does It Work

An IPO, or Initial Public Offering, is when a company that is private sells its shares to the public for the first time. The process is helpful to allow businesses to gain access to funding and investors to own a percentage of an expanding company.

What Is an IPO?

The definition of IPO means that a company becomes public by offering its shares to members of the public. Securities of a company are thus included in a stock exchange where anyone can sell and buy securities of the company.

• Definition: IPO’s full form is Initial Public Offering.
• Significance: Marks a major milestone for companies seeking to raise capital and expand.
• Transparency: Introduces regulatory disclosures for better investor protection.

Why Do Companies Go for an IPO?

Companies go public to serve various strategic as well as economic imperatives, such as

• Capital: Raising funds to expand operations, product development, or settle debts.
• Visibility: Boosting brand visibility and credibility in the market.
• Liquidity: Providing founders and early investors with an exit opportunity.
• Growth: Facilitating easier future fundraising through public markets.

Going public generally stimulates growth and gains investor confidence.

Who Can Invest in an IPO?

Most IPOs are offered to different kinds of investors:

• Retail: Direct investors can submit through brokers or through computers.
• Institutional: Institutional investors such as mutual funds and pension funds are typically offered priority shares.
• HNIs: High-net-worth individuals usually have access to larger allocations.

Allocation policies vary, but IPOs provide a broad investment opportunity.

When Does a Company Decide to Go Public?

Firms go public as a result of issues like

• Scaling: Achieving enough volume of business and profitability.
• Funding Needs: Requiring funding to expand or venture into new projects.
• Exit: Giving liquidity options to founders or initial investors.
• Market Conditions: Favourable economic and market timing selection.

This conclusion balances potential benefits with costs of being public.

How Does the IPO Process Work?

The IPO process entails several significant steps:

Step 1: Company selects underwriters

• Selection: The firm chooses investment banks to manage the IPO.
• Role: Underwriters contribute to pricing, regulatory requirements, and advertising efforts.

Step 2: Due diligence and regulatory filings (DRHP filing)

• Preparation: The company prepares a Draft Red Herring Prospectus (DRHP) with detailed business and financial information.
• Review: The filing is vetted by regulatory agencies to safeguard investors.

Step 3: Setting the IPO price (Fixed Price or Book Building)

• Fixed Price: The price per share is set before the IPO officially starts.
• Book Building: The current price is set by investor demand at bid times.

Step 4: IPO marketing (Roadshows)

• Promotion: Top company executives and underwriters go to potential investors to pitch business prospects.
• Engagement: Roadshows build investor interest and confidence.

Step 5: Opening of IPO for public subscription

• Subscription: Investors submit applications to buy stocks within a specified time period.
• Access: Access is possible by using brokers, web portals, and banks.

Step 6: Allotment of shares

• Allocation: The shares are allotted as per demand and subscription received.
• Oversubscription: Partial allotments are possible for investors if demand outweighs supply.

Step 7: Listing on stock exchanges

• Trading: The shares are officially listed and begin trading at exchanges like NSE or BSE.
• Market Price: The price that varies with supply, demand, and company performance.

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What Are the Risks and Benefits of IPO Investment?

Benefits of IPO:

• Return Prospective: High prospective returns if the company does well post-IPO.
• Early Access: Capability to invest prior to shares being made generally available.
• Diversification: Creates variety within a portfolio of investments.

Risks of IPO:

• Volatility: The prices of stocks are quite volatile after listing.
• Uncertainty: Historically limited data make valuation harder.
• Underperformance: Certain IPOs can decrease in value or underperform.

Investors should evaluate these carefully before investing.

Where Can You Track Upcoming IPOs?

You can easily track IPOs via various sources:

• Stock Exchanges: The NSE and BSE publish calendars and notices of IPOs.
• Financial Websites: Websites like Money control and Economic Times provide IPO news and alerts.
• Broking Platforms: Most brokers provide IPO tracking and subscription options.
• Regulatory Sites: The site of SEBI provides approved and filed IPO information officially.

Tracking keeps you organised to plan investments wisely.

What Happens After an IPO?

Following the listing, public company rules are to be followed by firms:

• Reporting: Submission of quarterly and annual financial reports.
• Governance: Holding annual meetings for shareholders and maintaining transparency.
• Market Relations: Managing investor expectations and reporting company progress.

Post-IPO compliance is highly significant to maintain investor confidence.

How Can an Investment Banking Course Help You Understand IPOs Better?

An investment banking course offers significant insights into:

• Basics: Defining what is investment banking and how it benefits capital markets.
• Process: Extensive understanding of IPO process, underwriting, and regulatory aspects.
• Skills: Financial modelling, valuation, and due diligence methods. 
• Market Insight: How investor demand and IPO pricing work. 

This data is helpful to investors as well as to finance professionals.

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Conclusion

Knowing what is an IPO, the definition of IPO, and the IPO full form is helpful to investors and business professionals. Going public makes corporations fund themselves and expand while offering investors new and exciting opportunities—but also new hazards. Staying current with IPOs and educating yourself on the process with an investment banking course can enrich your investment decisions as well as your overall understanding with respect to markets.

FAQs on What Is an IPO and How Does It Work?

What is the full form of IPO?

The full form of IPO is Initial Public Offering.

How can a retail investor apply for an IPO in India?

Applications may be made by retail investors using online modes as well as offline forms by brokers during the IPO subscription period.

Is investing in IPOs risky?

Yes, IPOs are risky since prices are volatile and public information can be limited. The investors should conduct proper research.

What documents are required to invest in an IPO?

Some common documents are a PAN card, banking details, and a demat account that is associated with your trading account.

Partham Barot is an ACCA-certified professional. showcasing his expertise in finance and accountancy. he’s revolutionising education by focusing on practical, real-world skills. Partham’s achievements underscore his commitment to elevating educational standards and empowering the next generation of professionals.

Current Role

Co-Founder & CEO at Zell Education

Education

• ACCA – Association of Chartered Certified Accountants, Finance (2011 – 2014)
• Bachelor of Commerce (BCom), Financial Markets from H.R. College Of Commerce & Economics (2010 – 2013)

Location

Mumbai, India

Expertise

ACCA Certified