What is an IPO – is this the question that bugs you a lot! Most likely you are a beginner level investor and asking yourself such questions will definitely help you to step up the ladder of stock market investments.
In this detailed review, we will answer this question for you and talk about some of the basics you must be aware of:
What is an IPO?
IPO or an ‘Initial Public Offering’ (check IPO full form for more information) is basically a way in which a private company ‘goes public’ and offers its shares to retail traders and investors. This is the first time in which a company is actually open to selling its ownership to the public. This is simply because of the reason that before filing an IPO, a company generally looks for funding and investment at private levels.
Before this, the company gets to run on its own through different private stakeholders trusting the team and the business strategy they are employing. Till the time a company is private, the business keeps its financial information confidential and does not share any data related to business progress.
However, things get different when a business looks to expand and wants to involve generic public and institutional investors into the fray.
The capital a company raises from an IPO is generally used for expanding operations, improving and updating technology, purchase new assets, get rid of loans and so on. The IPO process is relatively complex and requires various specialists and experts (at internal and external levels) to carry on the operations for at least 6 months to a year.
As soon as the business launches the IPO, the time it is open for bidding, it is termed to be opened up in the primary market.
Once an IPO is launched, the company shares are traded openly among different traders and investors in the stock market, also called the secondary market.
What does IPO mean for a Company?
Well, there are some implications for the company filing an IPO at both direct and indirect level, as mentioned below:
It helps to company to raise great capital for its various needs
improves brand visibility especially for companies with low marketing budgets
directly increases the brand trust factor among the consumers as compared to its rival companies
helps to improve the management reputation in the industry to an extent
At the same time, the company now has some areas of consideration as well, such as:
all financial statements, balance sheets are to be made public now
strictly follow as guidelines put in place by SEBI
go through regular audits at different levels to maintain its reputation in the market
All these factors play a huge role in deciding the IPO valuation. Furthermore, the businesses also need to see what Types of IPO they are going to go ahead with since it can be a big factor towards making or breaking the deal.
What does IPO mean for a Investors?
Investors and day traders get another investment opportunity in the market that may have the potential to get them decent returns. A day trader looks to make some quick money depending on his/her risk appetite while a long-term investor is there to gradually gain from the company post-investment.
However, if you are looking to go ahead with IPO Investment, make sure you perform a detailed IPO analysis, check the facts, see the way the company has been able to grow in the industry in the recent past and so on.
Although the Indian stock market is at its high these days (the article was initially written in October 2017 and regularly updated in 2018-19) nonetheless, you have to make sure you understand where you are putting your hard earned money.
If you are someone who is looking to apply for an IPO, you can use the IPO ASBA method in order to do that.
IPO related jargons
Whenever an IPO is opened up for bidding by retail and institutional investors, there are some terms used which are generally technical in nature.
Let’s discuss these ones by one:
Price Band: Price band is basically a range in which the IPO is opened up for bidding.
Bid Lot – a minimum quantity that an investor needs to bid for and further bidding is applicable in bid lot multiples only.
Registrar – is someone appointed by the company opening up the IPO with responsibilities of processing IPO applications, allocating shares to applicants based on SEBI guidelines, processing refunds etc.
Issue Size – the total number of shares opened up for overall bidding
QIB – the percentage of shares opened up for Qualified institutional buyers
NIB – the percentage of shares opened up for non-institutional buyers
Retail – the percentage of shares opened up for retail investors
Listing – name of the indices where the IPO will be opened up and listed
With this, we would like to wrap our piece on What is an IPO and hopefully, you now understand what exactly it is and how IPO works for different stakeholders.
Is IPO launch always successful?
Not necessarily, there have been quite a few instances when the IPO launch came out as a disaster for the business. Most of the times, businesses pull out from the IPO launch in time, sometimes they extend the bidding duration and in rare cases, the IPO is scrapped by SEBI based on its (under)subscription progress.
For example, Reliance power is one of the most prominent examples when we talk about failed IPOs. The IPO listed underperformed so much that the majority of the investors had to book losses on its listed day in the range of at least 20%. The major reason, in this case, was the market momentum and investor behaviour towards this unpromising trend.
Some of the other failed IPOs include Cafe Coffee day, Adlabs, ICICI Prudential etc. In a sense, one needs to know whether an IPO is worth investing or not in the first place.
Thus, before you look to apply for an IPO, make sure you understand the basics of investing in IPOs.