Initial Public Offering (IPO): Meaning, Benefits, and Allotment Process
The Indian economy is on the rise after suffering multiple setbacks during the COVID-19 pandemic era, and people are longing to invest their money. An Initial Public Offering (IPO) is an excellent tool for investing in the stock market and a fairly easy one as well. But first, it’s important to know what an IPO means and why anyone should invest in it.
What is an IPO?
IPO stands for Initial Public Offering. It is the process through which a company issues its shares to the general public for the first time.
The new investors buy the shares and provide the company with the capital to grow and expand. The people who buy the shares of a company become part owners.
Benefits of IPO
There are several advantages of IPOs, for both the company and the investors.
Funding: Whether it’s an established company or a startup, every business needs funds. And bank loans and angel investors only have a finite amount of money, which they demand back with interest or take a bite from the profits. An IPO is a simpler way of raising funds and getting listed on the stock market.
Publicity: Whenever a company goes public, it has to spend money on advertising and publicity. Otherwise, no one will know that its IPO is out. This can boost the company’s standing with customers, as being public gives it more credibility. And the added publicity will help the company better sell its services.
More Liquidity: Once a company goes public, investors can sell the company's stock on the open market. This allows them to reap profits without waiting for their shares to be repurchased.
Long-term benefits: Since the IPO investor who buys the shares does so directly from the company, he can realise long-term profits. The same red-herring prospectus is accessible to all the investors, so if one thinks that the company’s revenues will be turbulent initially but go up, later on, he’ll succeed in the long run while the other, more cautious investors will bow out early.
Lower Prices: In the early stages, the share price of a company is low as it hasn’t established itself. But once that happens, the share prices increase.
Disadvantages of IPO
Like most things, IPOs also have some disadvantages for both the owners and investors.
Regulatory requirements: getting listed on the stock market is no easy feat. Due to the stringent process, a lot of time and money is spent by the company while following the guidelines of the SEBI.
Risk to Ownership: Once a company goes public, it is open to investment from anyone. A competitor or someone with poor vision but enough money can perform a hostile takeover. For instance, Elon Musk and the Twitter buyout. Plus, the founders of the company and its present owners will have to answer to the majority stakeholders, which could lead to micromanagement and bias.
Leaks: The company has to release significant inside information about its workings, culture, and revenues so that the investors can make educated decisions. During this process, some sensitive or unwanted information can also go public, jeopardising the company.
Volatility: IPOs fluctuate greatly in the early days. Sometimes they can reduce their price and downgrade your investment.
Time-Consuming: Investing in IPOs is more complex and time-consuming than just buying shares of a company. IPOs have fixed quotas for different types of investors, and there is a long allotment process for the general public to invest in the IPO.
IPO Allotment: How Can You Apply for an IPO?
While applying for an IPO is a fairly simple process, there are some prerequisites everyone should know.
To apply for any IPO, you need a demat account, a trading account, and an active bank account with the required funds.
These days, there are many platforms like Zerodha club demat and trading accounts. You can choose any brokerage platform depending on your convenience.
Also, be sure to read the red-herring prospectus of the company on SEBI’s website. A red herring prospectus contains information about the company’s operations, functioning, past revenues, etc. Go through the prospectus carefully to make an informed decision about your IPO investment.
Once you have collected the capital and are ready to invest in the IPO, all you need to do is pick the lot size and bid. There is only a finite amount of shares you can buy, so keep that in mind.