Things You Should Know Before Investing in IPO

Initial public offerings are a great way to participate in the growth of a company. An IPO is the first time a company sells its shares, or gives part ownership, to the general public. IPOs are known to create wealth for shareholders who enter a stock at IPO stage. Imagine buying a stock at Rs 100 and then witnessing it become Rs 2000 in a few years! To know more about IPO, how to apply for IPO and what are the benefits of investing in IPO, you should read this article.

Initial public offering is the IPO full form. This is the very first sale of shares/stock issued by a company to the public. For instance, Infosys shares today trade at Rs 750. But, Infosys did its IPO many years back in February 1993 at Rs 95 per share.

By selling shares to the public, companies raise money. For investors, they get fractional ownership of the company by getting shares. When the IPO shares are available for trading usually in 7-15 days, investors can make a profit by selling the same shares at a higher price.

Thus, IPOs allow you as an investor to subscribe to shares and make a profit. You also have the option to hold the shares for as long as you want if you are a long-term investor.

There are many benefits of investing in IPOs. It is not just about new IPO listing gain. There are many advantages in investing in the new IPO in share market.

1. Early entry - By investing in an IPO, you get the first entry in a high potential stock. Sometimes, a stock never comes down to IPO price such is the pace of appreciation. For instance, Avenue Supermarts IPO happened in Rs 295-299 per share price band. Today, the stock is at Rs 1300 levels. It has not come to IPO price levels ever since listing.

2. Long-term wealth creation - IPO investments are equity/stock investments. They have the potential to bring in big returns in the long term, say 10-20 years. An Rs 2 lakh investment can become a sizeable corpus and fulfill long-term financial goals.

3. Same for big and small investors - Big investors have more resources than small investors. But, an IPO gives access to the same information to everybody - be it a big investors or a small one.

Advantages of investing in IPO Disadvantages of investing in IPO
  • Create long-term wealth in a simple way
  • Create long-term wealth in a simple way
  • Buy cheap early and sit tight
  • Entry price of IPO may be much higher than market price
  • Investors, irrespective of size, have equal access
  • No previous track-record of stock behavior and movement
  • Online, easy to use buy future multi-bagger stocks today
  • No safety net for investors if steep price correction happens after IPO listing

There are many online news portals that offer latest IPO news. Information on upcoming IPOs is published in print publications like newspapers. Brokers like Nirmal Bang display information about IPOs and also offer separate facility to invest in them.

Check the IPO news and updates.This link will tell you about any upcoming IPO in 2019 i.e. this year. Keep on checking this link once is a few days to get latest updates and reports about what’s hot in the IPO market.

Any adult individual, with a valid PAN and demat account, can apply in the IPO of a company.

If you want to hold the IPO shares, then having a demat account is sufficient. If you want to sell the IPO shares, then a trading account will be required. This is why brokers will advise you to open a trading account along with demat account when you apply for an IPO for the first time in your life.

Every IPO has shares kept separately for retail investors. Investments up to Rs 2 lakh in an IPO are for retail investors. For instance, 1000 shares at Rs 200 per share mean you invest Rs 2 lakh.

Do remember that it is beneficial to invest in the IPO retail quota. In this way, many retail investors get shares as per allotment.

Apart from the mandatory PAN, demat plus trading account, you need money to invest in IPOs. You can use your savings to invest in an IPO.

But do not worry if you don’t have sufficient funds in your account. There are many banks and non-banking finance companies (NBFCs) that will lend you money, at an interest rate for IPO investing.

Once you have the money, you can begin the IPO application process. Let us tell you how to apply for IPO in a few easy steps.

1. You can apply for IPO through activated trading account or bank account. You can place orders by calling your relationship manager (RM), applying on mobile app or contacting centralized call centre. You can do an online IPO application also if you want. Structure wise, how to buy IPO online is not different from any other routes.

In the good old days, people had only one way to invest in IPO - buying the ipo form and applying through broker.

2. There is Application Supported by Blocked Amount (ASBA) facility, which is mandatory for IPO applications. The ASBA allows the banks to block money in your bank account for the IPO.

3. Next comes, bidding step. You need to bid as per the IPO lot size is mentioned in the IPO prospectus. Lot size is the minimum number of stocks/shares you have to apply for during an IPO. There is a bid price. The company usually sets IPO price band. You have to bid for shares anywhere in the IPO price band.

4. Once you are done applying, IPO share allotment will happen. If there is too much demand, you may get fewer shares than you had asked for. In rare occasions, you may not get any IPO shares. Once the shares are allotted, they will be credited to your personal demat account.

We have mentioned ASBA in the previous section. Some of you may want to know more about ASBA.

Simply put, ASBA is an application made by an investor and it contains an authorization to Self-Certified Syndicate Bank (SCSB) to block funds available in applicant’s savings bank account or current account. This money is for subscribing to an IPO.

If an investor is applying through ASBA, her/his application money is debited from the bank account only if her/his application is selected for allotment.

The beauty of ASBA is that the funds blocked in the account will continue to earn interest during the application processing period. This is if the money is held in an interest-bearing account.

After IPO allotment is complete i.e. shares are given to investors, the shares have to be listed for trading on the stock exchange. Once the shares are listed, investors can trade them i.e. buy or sell. The IPO price is known to all. But, the IPO listing price is not known, and it depends on the kind of response and demand.

For example, the biggest listing day gain happened for Apex Frozen Foods, which listed at 205% premium. Central Depository Services (CDSL) shares debuted with 68% gains on the National Stock Exchange on listing day in 2017. Those who missed IPO of CDSL missed a great opportunity. Similarly, HDFC Standard Life had gained around 46% on its listing day. Some IPOs do not have good listing. Historical examples are Chand & Co, which fell 42%. Capacite Infra, Shalby, Aster DM Healthcare, and Matrimony.com also fell on listing day.

Since investors do not know at what price IPO shares of a company will list, they use different indicators. One such parameter is IPO grey market premium. The IPO grey market is an unofficial assessment about the listing price activity. This is usually referred to by investors to get a fix on the potential gain or loss of the stock.