Beginner's guide to IPOs: How they work and why you should care?

What is an IPO?

IPO meaning as mentioned above is a process where a private company offers its shares to the public for the first time. It is a way for companies to raise capital and expand their operations. When you invest in an IPO, you are purchasing shares of a company, becoming a part-owner, and acquiring a stake in its future profits and growth.  

How IPOs work? Six key points

An IPO is a complex process that allows a private company to go public by selling its shares to investors. Here are six points on how IPOs work.  

1)       Preparation phase

Before going public, a company must meet various regulatory needs set by the Securities and Exchange Board of India (SEBI). This includes preparing financial statements, drafting a prospectus, and receiving approvals. The company is required to ensure compliance and transparency with SEBI’s guidelines to establish trust with potential investors. This phase is essential as it lays the grounds for a successful IPO investment.  

2)       Selecting underwriters

The company chooses investment banks (underwriters) to assist with the IPO process. These underwriters evaluate the company’s value, fix the initial share price, and sell the shares to investors. They play an imperative role in deciding the demand for the IPO and ensuring that the shares are priced well to attract investors. The underwriters’ expertise is crucial for the company’s smooth transition from private to public.  

3)       Pricing the IPO

The underwriters decide the shares’ price depending on factors like the company’s financial health, market demand and industry trends. This price-setting procedure is essential as it influences the IPO’s success. A well-priced IPO can entice a broad range of investors and ensure that the company raises the desired capital. Pricing an IPO too high can deter investors while pricing it too low can undervalue the company.  

4)       Marketing the IPO

The company and underwriters begin a roadshow presenting the IPO to potential investors to generate interest and understand demand. This can include meetings, presentations, and advertisements. The roadshow is an opportunity to display the company’s strengths, growth potential and future plans. Effective marketing can considerably affect the level of investor interest and the thorough success of the IPO.  

5)       Public offering

On the day of IPO, the company’s shares are listed on the stock exchange such as National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Investors can now purchase and sell the shares in the open market. This phase marks the company’s official transition to a public entity. The shares’ performance on the first day of trading can set the picture for future investor sentiment and the company’s market valuation.  

6)       Post-IPO phase

Post the IPO, the company should comply with additional reporting needs and continue to perform well to maintain investor confidence and stock price. Periodic updates on financial performance, adherence to regulatory guidelines, and strategic business moves are crucial for sustaining investor trust. The company’s potential to deliver on its promises can determine the long-term success of the IPO investment.  

Why should you care about IPOs? Five key points

Understanding why IPOs matter can help you make well-informed investment decisions and capitalise on market opportunities.  

1)       Investment opportunities

IPOs offer a chance to invest in a company at an early phase. If the company grows, the share value can be enhanced considerably. Investing in IPOs can potentially generate high returns if you figure out and invest in companies with strong growth potential.  

2)       Diversification

Adding IPO shares to your investment portfolio can help diversify your investments, lowering thorough risk. Diversification is an essential strategy in investing, and IPOs offer an opportunity to include new and emerging companies in your investment portfolio.  

3)       Growth potential

Companies going public are often in a growth stage. Investing in IPOs can offer higher returns than established companies. These companies might have innovative products or services that can capture considerable market share, driving their growth and your returns on investment.  

4)       Market sentiment

IPOs can impact market sentiments and trends. Successful IPOs can boost the confidence of investors and create a positive market environment. Staying aware of and participating in IPOs can keep you informed regarding market dynamics and emerging industry trends.  

5)       Evaluate quality stocks

Some IPOs come from established industries and brands. Investing in such IPOs can provide exposure to high-quality stocks. Recognised brands often have a well-proven track record and an excellent market presence, making their IPOs a valuable addition to your portfolio.  

Ending note

Understanding IPOs is essential for any investor wanting to expand their portfolio. They provide unique opportunities to invest in companies during their growth stage and can offer considerable returns. Whether you are new to investing or looking to diversify your holdings, IPOs are worth considering.

To maximise IPO investments, having a secure and reliable demat account is crucial. Opting for a leading brokerage firm that offers holistic services helps you to undergo the IPO process smoothly.

So, do not wait; begin your investment journey today and unlock the potential of IPOs.

 

 

 

(This article is part of IndiaDotCom Pvt Ltd’s Consumer Connect Initiative, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The IDPL Editorial team is not responsible for this content.)