Stock exchanges in India allow investors to buy and sell shares of public companies. However, it is not India’s only place to trade public shares. Investors can purchase shares of public companies in the primary market through Initial Public Offerings (IPOs). The popularity of IPO investments has increased over the years in India. Investors now wait for IPOs of reputed and established companies to invest in them. As a result, investors can earn dividends and build a diverse portfolio by investing in IPOs.
Let us discuss everything about IPO investments in this comprehensive guide.
Basic Definition of IPO
An initial public offering allows a company to become a public entity. To do so, the private company must register for an IPO with the Securities and Exchange Board of India (SEBI). After launching an IPO, the company becomes a public entity in the true sense. It also allows the company to secure funds by selling ownership stakes to various types of investors. Retail and institutional investors participate actively in IPOs to get shares of a newly-turned public entity.
Companies launch their IPOs for a wide variety of reasons. Some companies turn public to accumulate extra funds from investors. Some want to improve their situation by repaying debt. When a company becomes public, it must ensure transparency in its operations to please the investors. IPO is a multi-day event or process through which the company issues and allots its shares. Investors are allowed to submit their IPO applications with accurate details. After considering all applications, the issuer allots shares to approved investors.
Do You Know the IPO Types?
Before investing in a current or an upcoming IPO, you must know its types, which are as follows:
Fixed-Price Offering
The first IPO type is the fixed-price offering. In a fixed-price offering, the share price remains the same throughout the IPO process. Investors are informed about the static share price in advance, and they must pay the issuer in full to apply for a fixed-price offering.
Book Building Offering
SEBI allows companies to accept bids from investors throughout the IPO. Investors will place bids, which is the price they are willing to pay for the shares of the company. The bidding price of a share can be equal to or more than the floor/base price. Instead of predetermining a fixed share price, the issuer builds a book daily.
How to Submit an IPO Application?
Now that you understand what is an initial public offering, here’s how to apply for one:
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Start by opening a trading account with a broker. Also, apply for a Demat account to hold the IPO shares when approved.
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Use the investment platform (web-based portal or application) of your broker to access your trading and Demat accounts. It will also allow you to browse current IPOs and submit your application.
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Choose an IPO and read its prospectus to understand the lot size, floor price, closure date, and other IPO details.
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Apply for the IPO via the trading platform. You must accurately mention your bidding price, UPI ID, and other details in the IPO application.
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Submit the IPO application and wait for the IPO to close.
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The issue begins allotment after the IPO closes. You will receive communication when approved for allotment. The allotted shares will be reflected in your dematerialisation account.
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The blocked amount in your account is freed when the issuer rejects the IPO application.
Conclusion
Investing in IPOs can allow investors to earn dividends and build a diverse portfolio. You can rely on a trading platform to browse current offerings and choose the right one. Choose an IPO and submit your application today!
