From Utkarsh Small Finance Bank, Bajaj Finance, to Yatharth Hospital, news about these upcoming companies having successful IPOs is widespread in finance. But what is the meaning of an IPO?
An IPO or Initial Public Offering, is the process through which a company offers its shares on the stock market exchange for the first time. It marks a company’s transition from a private to a public corporation. Companies often use IPOs to raise equity from public investors and gain public visibility, which can help aid and expand their existing operations.
There are several benefits in store for investors interested in IPOs. Firstly, it's a great opportunity for you to participate in the growth and decision-making of a company. Secondly, IPO shares are a good long-term investment option. And thirdly, they’re more transparent, as compared to other forms of investment, since the company going public must disclose all information openly.
The process of going from a private to a public corporation is a challenging one. Companies usually opt for an IPO once they reach a ‘Unicorn Status’, or a valuation of Rs. 1 crore. For registration, the company must first fill out and submit an IPO application form called the Draft Red Herring Prospectus (DRHP), and submit it to SEBI, the stock exchanges, and the Registrar of Companies.
After approval from these 3 bodies, companies then use investment banks to gauge market demand and conduct a proper valuation to set an IPO allotment (price and time). The value of the company’s issue size shouldn’t exceed more than five times the company’s net worth.
Applying for an IPO is a simple process. Basic requirements for investors looking to buy IPO shares include having a bank account linked demat and trading account, and a PAN (Permanent Account Number) card.
An IPO usually stays open for 3-5 days for a subscription, providing sufficient time for investors to subscribe for shares.
There are several pre-indicators to invest in IPOs. For example, the IPO GMP, or Grey Market Price, is the difference between the IPO’s issue price and its trading price in the Grey Market. Before a company goes public on the stock exchange, it is unofficially traded on the Grey Market, also through investor sentiments towards the IPO can be gauged. If the GMP is high, it suggests that investors are expecting the share price to rise once listed. On the other hand, if the GMP is low, investors are expecting the share price to fall. However, besides only examining the GMP, investors should also examine their investment objectives, research the company, assess their risk tolerance, and consult financial advisors.
IPOs can be a game-changer for both companies and investors, but they also come with inherent risks and uncertainties. For companies, going public can mean access to capital and greater visibility, but it also entails greater scrutiny and demands for transparency. For investors, IPOs can provide exciting growth opportunities but may expose them to heightened volatility and the lack of historical data.
Before considering investing in an IPO, individuals should thoroughly research the company, assess their risk tolerance, and consult with financial advisors. Likewise, companies contemplating an IPO must carefully evaluate their readiness, objectives, and long-term strategies to make an informed decision.
As with any investment, informed decisions and careful planning are vital to navigating the IPO landscape successfully. To understand more about investing in IPOs, you can write to us at info@moneyedge.co.in or call us at 8699993333. You can check out our branches and timings, by clicking on this link.
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