Today in this article we will talk about what is ipo in share market, apart from this we will talk about more things related to it like How to invest in ipo, IPO full form in share market, IPO investment benefits, or ipo investment disadvantages.
People these days are becoming tech-savvy, and with that, they are opening up to investing. The millennials are searching for more unique avenues to grow their money.
there are a few things that you need to know before they begin investing as you should know about the domain in which you are putting your money. One such section that confuses people is IPO, its intricacies, and the standard terms associated with it.
So let’s start by reading this article carefully about some basic information related to what is ipo investment and get good information about IPO Investment.
what is ipo in share market
An IPO is an initial public offering. In an IPO, a privately owned company lists its shares on a stock exchange, making them available for purchase by the general public.
In other words, IPO is the selling of securities to the public in the primary market. A primary market deals with new securities being issued for the first time.
After listing on the stock exchange, the company becomes a publicly-traded company and the shares of the firm can be traded freely in the open market.
Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public.
But while they’re undeniably trendy, you need to understand that IPOs are very risky investments, delivering inconsistent returns over the longer term.
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Types of IPO
There are two types of IPOs. They are dependent upon the type of price generation the company or the underwriter is going for. These are of two types:
Fixed Price Offering(IPO)
In Fixed Price Offering, the company decides on the price of the stocks initially, and any buyer or investor pays that amount per share to obtain the desired number of stocks.
The demand for the stocks in the market can be known once the issue is closed. If the investors partake in this IPO, they must ensure that they pay the full price of the shares when making the application.
Book Building Offering (IPO)
In Book Building IPO, the company decides the price band of the forthcoming IPO. The interested investors bid on the shares before the final price is decided.
Here, the investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share.
The lowest share price is referred to as floor price and the highest stock price is known as cap price. The ultimate decision regarding the price of the shares is determined by investors’ bids.
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Advantages of an IPO
Now let’s look at some of the Advantages of an IPO.
Access to more Capital
IPO allows companies to raise capital by selling shares. Moreover, companies don’t have to repay the capital raised through the issuance of IPO.
Easy to raise new capital
As it is difficult for private companies to raise capital, by going public, raising capital becomes comparatively an easier task.
Improved Public Image
Once a company is publicly listed, its public image is bound to improve. This will attract investors, especially banks, which will be more inclined to invest in a publicly listed company.
It increases the reflectivity and reputation of the company. This leads to enhancement of the company’s brand image.
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Liquidity
An IPO is the perfect opportunity for wealth creation for these key stakeholders who have toiled away, working hard to make the company a success.
When the shares of the Company are listed on the stock exchange, they can be easily traded. A liquid market is created for the company’s shares, and the stakeholders can reap the benefits.This helps in providing more liquidity.
Employee Prestige and Retention
After going public, the company may choose to provide perks such as stock incentive packages to its employees. Employee prestige and confidence in the company can increase.
With the advent of the IPO, a Company can attract as well as retain its employees by offering them stock options/stock purchase plans.Better and brighter talent will be attracted and encouraged to perform well through this compensation strategy.
No or Zero Cost of Capital
Company does not have to pay any interest on capital raised from the public. Also there is no need of repayment of capital as well, except on winding up of company.
In such a case the company has to pay the residual amount after it pays all other creditors like bank loans, debentures, preferential shares etc.
More Information : IPO basics
Pricing and Valuations
IPO enables correct valuation for the company, as the share price is a true reflection of the financial soundness of a company. Also this would aid in case company wants to go for mergers and acquisitions.
Disadvantages of an IPO
Market Pressures
Market pressures can be very difficult for company leadership who are used to doing what they feel is best for the company.
Founders tend to have a long-term view, with a vision of what their company will look like years from the present and how it will impact the world. The stock market, on the other hand, has a very short-term, profit-driven view.
Dilution of control
Dilution of ownership makes the company susceptible to future takeovers.
Expensive and time consuming
The whole process of an IPO takes substantial amount of management time and efforts. Also it involves very high expenses like that of underwriter, lead manager, investment banker, etc.
Regulations
It increases the regulatory monitoring of the firm to ensure that the firm is making filings along with relevant disclosures.
Accountability
The firm is accountable to investors, also the cost of maintaining investor relations are high.
Things you should know before investing in an IPO
- If you invested in an IPO, your investments are directly linked to the fortunes of that company.
- This type of investment carries a higher risk and can offer huge returns too.
- You should be aware that a company which offers its shares to the public is not indebted to reimburse the capital.
- Usually, it is good to have some experience before investing in an IPO. Taking advice from a personal finance manager before investing may help you avoid trouble.
- You require a demat account to invest in an IPO. You can look for a free demat account and start investing.
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Frequently Asked Questions what is ipo in share market
How does an (IPO) work?
A company aiming to go public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement.
Later, along with the underwriting agreement, they file the registration statement with the regulator. SEBI scrutinizes the disclosed information and after verification allots a date to announce the IPO.
Can I sell IPO immediately?
There is no lock-in period for retail investors. You can sell your allotted share anytime
How do you make money from an IPO?
If you participate and buy stocks in an IPO, you become a shareholder of the company. As a shareholder, you can enjoy profits from sale of your shares on the stock exchange, or you can receive dividends offered by the company on the shares you hold.
Can IPO make you rich?
The more heavily subscribed an IPO, the less your chances of winning the allotment lottery.Retail investors who do get IPO allotments usually get such low quantities of shares that it hardly makes a difference to their wealth – even if prices were to double on listing.
Is IPO risk free?
The biggest risk factor in applying for an IPO is that you will not guarantee of receiving the shares.If you are a small-time investor and the number of individuals is many then the allotment mechanism of Pre-IPO shares in India will hardly get you any share.
What is the difference between IPO and share?
While an IPO is the first or initial sale of shares of a company to the general public, an FPO is an additional share sale offer.
In an IPO, the company or the issuer whose shares get listed is a private company. After the IPO, the issuer joins the likes of other publicly traded companies.
Can you lose money on an IPO?
In an initial public offering (IPO), a private company “goes public,” making its stock available to investors to buy on a stock exchange or over-the-counter market. IPO stock can be a valuable investment, but sometimes investors lose a lot of money.
Conclusion
An initial public offering may or may not be the right direction for your company. IPOs come with a host of advantages and disadvantages. While this article highlights many of the common pros and cons of an IPO, it is not comprehensive.
If you are considering an IPO, be careful to weigh all of the advantages and disadvantages, be patient, and consider all of your alternatives. For more information on these alternatives, read our Alternatives to an IPO article.
