Investors are always on the lookout for investment avenues that will help generate wealth and maximize returns. Many companies offer an ’Initial Public Offering’ (IPO), which is the first sale of stock issued to the public. IPO is also known as going public by the company. It is an opportunity for the company to raise funds from the public.
Things to know before investing in IPO
Investors need to understand the basics of investing in an IPO before making an investment decision.
Based on the price of shares, there are two types of IPOs, one is fixed price and the other is a book building issue. In the fixed price IPO, the price of the shares will be fixed in advance and the investors will have to purchase the shares for that rate through the demat account.
In case of a book-building issue, investors may bid on the shares.
There will be a range of prices and the investors may bid within the range. Based on their bidding, the company will allot the shares. In order to participate in book- building, investors need to put money into the IPO trading account before the closing date of the IPO and place an order.
If the bid is successful, the shares will be allotted on the date of settlement. In case the shares are not issued, the money will be refunded within a period of 15 days.
Benefits of investing
Investing in an IPO will allow investors to buy a stake in the company at an early stage. The first investors in the company will get the shares at a relatively cheaper rate and investors can benefit from the rise in share prices in the future. There are higher chances for retail investors to get an allotment of shares.
If the share prices go up after the allotment, investors can significantly benefit from the same.
Risk and Returns
IPOs are issued by those companies, which are not yet established in the market; hence, the risk associated with the same is higher. Investors simply bet on the growth prospects of the company and make an investment decision. Investors can generate wealth or lose all their money.
The risk associated is high since it will be difficult to track the past performance of the company without financial statements. However, the returns can also be quite high if the company achieves profit and growth.
Investors need to open a demat account with the bank in order to invest in an IPO. The account will be linked to the savings account of the bank, thus making it easier to make transactions.
Every investor is advised to thoroughly read the prospectus and learn about the business of the company, the sector it operates in, the purpose behind the IPO, and their long-term financial goals. Investing in an IPO is a risky decision; hence, it should be carefully made by research, analyses, and thinking it through. Investors can seek the advice of stock market brokers who can help them to make the right investment decision.
In case you are looking to invest in an upcoming IPO, feel free to provide basic details in the form below.