The Basics of IPOs

IPO (Initial Public Offering) is a way to invest in companies before they get listed on the Stock Market. From tech giants to fast-food chains, IPOs let you invest in the growth stories of your favourite companies before they hit the Market.

 What is an IPO?

When a company offers its shares for the first time, it is called an IPO or an Initial Public Offering. During this process, the company offers its shares to the general public and this entire process is carried out through the primary market.  It simply means that through IPOs, the company collects funds which it uses to grow the business or to pay off any heavy debts. Through the IPO, an unlisted company becomes listed in the stock market.

Should you invest in an IPO?

Again, let’s take an example to understand this. Suppose you want to buy an ITC share and you want to buy it for Rs 200. Now, there is also an investor who has ITC shares and he wants to sell it for Rs 210. In this case, there’s a seller and a buyer who negotiate and then decide to sell and buy the share for Rs 200, and hence the trade will get executed.
When we are trading shares, the price is negotiable. But this is not the case for IPOs. The prices are not negotiable.
Now, let’s see – who decides the prices for the IPOs?
Well, they are neither decided by the government, nor by the public. These prices are decided by the owners of the company itself.
Let’s take another simple example. Assume that there’s a land owner, who wants to sell her land. Now what would she want? She’d obviously want to get the maximum amount of money for her land, not less. She won’t think that because the land’s value is Rs Fifty Lakhs, she’ll only sell within that price range. If some buyer is ready to pay her Rs Sixty Lakhs, then she’ll obviously sell it for that amount happily.

Similarly, the owner of a company will also want to get as much money as possible from the public. And that is why a lot of IPOs are overvalued and not available at the right price. The shares that generally cost around Rs 500 will be available for Rs 700 or Rs 800 during IPO.
But not every IPO is overpriced.
Let’s consider the example of the land owner. If the land owner is in urgent need for money, then she will not wait to get Rs Fifty Lakhs or more, she might even sell it for a lesser amount.
The conditions could be similar for IPOs as well. Company owners will face some restrictions and experiences when working with Banks, NBFCs or while listing their stocks on NSE or BSE. Since these companies have to follow government, RBI or SEBI guidelines, they are under pressure to get their IPOs listed quickly because penalties could be levied on them if IPOs are not listed within the right time period. And they also have to be fully subscribed. And that is why these IPOs aren’t overvalued because they don’t want to take the risk of being undersubscribed.
Because these IPOs follow certain guidelines by RBI or SEBI and are forced to get their IPOs at a fair value, they are called as Forced IPOs.
Forced IPOs are fairly priced and hence it’s a good idea to invest in them.
Because some companies have this pressure, they launch their IPOs through OFS.

What does it mean to the company?

When the general public like us invests in IPOs, it gives the company the responsibility to manage it efficiently so that the shareholders aren’t at a loss. This leads the company to make itself efficient and effective.

Why do companies offer shares?

Every company seeks to maximize profits for its stakeholders. To attain this objective, a company strives to ramp up its ability to trade more and make greater profits. In this pursuit of growth, often, a company is constrained by bottlenecks, one of the most common being ‘capital’. Thus, to gain capital and grow rapidly, a company invites the public to buy its shares by means of an IPO.

How does one subscribe to an IPO?

Here’s is what you have’ve to do to get your hands on the hot IPO you may have been eyeing –

  1. You can make a bid for shares only if an IPO is open to retail investors.
  2. Locate your 16 digit DP-ID. The first 8 digits would belong to your broker, while the last 8 form your client ID.
  3. Login to your internet banking portal, and head over to its IPO section.
  4. Select the company whose IPO you wish to subscribe to. You’ll then be expected to enter your 16 digit DP-ID to link this subscription to your demat account.
  5. Note that it is essential to open a demat account to subscribe to an IPO online. Your PAN number has to be disclosed for transactions exceeding Rs. 50000.
  6. Once shares are allotted to you, they are credited to your demat account. In case you have an account with Upstox – your shares will be visible to you in the Holding section on Upstox Pro Web or Upstox Pro Mobile. In case shares are not allotted due to oversubscription, a refund is made through appropriate channels.

Wrapping Up

  • An IPO isn’t really a modern concept. Companies have been raising funds via issues of shares for centuries.
  • You too can subscribe to an IPO via your bank account, and get your alloted shares deposited into your demat account.
  • As is evident, it’s rather simple to get started an IPO. If you’ve been observing your favorite company and waiting for it to get listed, an IPO is the best way to gain partner ownership on it quickly. Information on upcoming IPOs can be found online here

How to apply for an IPO on Upstox?

  • Step 1: You Need To Open Demat Account With Us
  • Step 2: Pick your preferred IPO and click on the ‘Details’ tab
  • Step 3: When you open this link, you have to enter your user ID and PAN card details
  • Step 4: Now, you will be logged in’
  • Step 5: Enter your birth year for verification
  • Step 6: Scroll through the summary page of the IPO to the bottom where you will find a ‘Place Bid’ option
  • Step 7: Click on the ‘Place Bid’ option
  • Step 8: Enter your UPI id here
  • Step 9: Choose your investor category. If you’re an existing shareholder, then choose ‘Shareholder’, otherwise choose ‘Individual Investor’ and click on continue.
  • Step 10: Bid for shares within the IPOs price band. You could either choose on the price band or simply choose the cut off price. You also have to enter lots here. Click on continue
  • Step 11: Verify the order details and
  • Step 12: Place the order

After this you’ll receive an SMS of payment approval on your UPI app which means that your amount will be blocked till the allotment day.
And that’s a wrap!

Thank you for reading this article. We hope that you found it helpful. If you want to read more on the topic, check out our series on investment topics here on our blog or you could also check them out on our YouTube channel.

For Invest in IPO , Open Your Demat Account!