What is an IPO? Definition, Basics, Pros, Cons

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What is an IPO?

IPO or an ‘Initial Public Offering’ 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.

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.

Once an IPO is launched, the company shares are traded openly among different traders and investors in the stock market, also called 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 the 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

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 be such an investor, 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 written in October 2017 and updated in December 2017) nonetheless, you have to make sure you understand where you are putting your hard earned money.

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 BandPrice 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 – total number of shares opened up for overall bidding

QIB – percentage of shares opened up for Qualified institutional buyers

NIB – percentage of shares opened up for non-institutional buyers

Retail – percentage of shares opened up for retail investors

Listing – name of the indices where the IPO will be opened up and listed

Also Read:

What is the Price Band of an IPO?


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