Meet Apurva! She came across the word IPO when everyone around her was talking about LIC’s IPO. She is new to the concept and wants to know how to invest in IPO. So, let’s learn about IPO with Apurva.
Since, the last 3-4 years everyone around has been very fascinated by equity markets, as it has performed really well and delivered a good amount of returns. Due to this lot of individuals are attracted to investing in equity markets. India’s Demat accounts have more than doubled in 3-4 years. Investing directly in equity markets requires adequate knowledge, patience, and time to track your holdings. Since then, Mutual Funds’ Assets Under Management (AUM) have been also increasing. Investing in equity markets is suitable for the longer term in order to reap inflation-beating returns, as in the shorter term, equity markets are very volatile in nature.
The equity market has two segments viz. Primary Market and Secondary Market.
- Primary Market: Certain eligible companies can enter the capital market to fulfil their capital requirements. Eligibility criteria for launching IPO have been laid down by the capital market regulator-SEBI. When a company enters the capital market for the first time whereupon its shares are to be listed on the stock exchanges, such an issue is called “Initial Public Offering (IPO)”.
- Secondary Market: This market is what people are talking about when they refer to the “stock market”. In this market, investors trade in previously issued securities.
Therefore, in the primary market company sells new stocks to investors for the first time. Whereas, in the secondary market, investors trade in existing securities.
What is IPO?
It is a process by which a private company can go public by sale of its stocks to the general public. It could be a new, young company or an old company that decides to be listed on an exchange and hence goes public.
Why is IPO announced?
- Objective: The principal objective of IPO is to raise capital from the public to expand the business, fund the research and development, repayment of debts, etc in order to grow the company further.
- Ways to Raise Capital: The company can either issue new shares to the public known as Initial Public Offer (IPO). Or the existing stakeholders(early investors) can sell their shares to the public without raising any fresh capital known as an Offer for Sale (OFS).
Key terms related to IPO
- Issuer: The company that issues stocks to raise capital.
- Open / Close Date: The dates when investors can bid for shares being issued by the company.
- Allotment Date: It is the date when the allotment status is announced to the public on the website of the registrar of the IPO.
- Price band: It is the lower price and the upper price per share on which the investors can bid.
- Lot size: It is the minimum number of shares that an investor needs to bid for. It is fixed by the company.
For Example, Zomato fixed the lot size as 195 shares. This means that investors cannot bid for 1 share or even 100 shares- they can bid for 1 lot (195 shares), 2 lots (195*2=390 shares), and so on.
- Under-subscription / Oversubscription: When the company receives less/more no. of applications than the no. of shares being offered to the Public
Types of Investors in IPO
Now questions such as how to buy IPO, how to invest in IPO, or how to apply IPO online might be popping into your mind, let’s answer the same.
How to invest in IPO?
To invest in IPO shares, you must first open a Demat account as well as a trading account. Demat accounts are typically required to purchase shares in an IPO. However, if you wish to sell those IPO shares to a secondary market in the future, you will need to both open a Demat account and a trading account. A Demat account holds the shares and securities (bonds, ETFs, mutual fund units, etc.) in electronic mode, while a trading account provides the interface to buy and sell shares in the stock market.
How to buy IPO online?
Here are all your answers when it comes to how to apply IPO online:
- Have a Demat account with a broker that offers IPO access
- Choose the IPO you want to invest in from the list
- Then add your UPI details
- Add quantity of lots you wish to bid for
- Lastly, submit your bid, and then you are subscribed to the IPO
- The allotment process of the IPO depends on how the public offer has got a response from investors. If IPO is undersubscribed then investors might get allotted all lots for which they have applied. While, if IPO is oversubscribed, then an investor might get the allotment or might get allotted partially or fully.
- How you will know whether IPO is allotted or not? You will receive an email along with the allotment details.
- Once you have been allotted shares in an IPO, the next thing to do is to wait for the listing date. The listing date will be announced via circulars on NSE, BSE website. It gets credited to your Demat Account.
IPO investment tips:
- These days investing in IPO has become fashion and whosoever gets the allotment then it’s considered as they have earned a lottery as it will help you quick money. However, this is not always the case, as you can even incur huge losses if you have invested without any research and without considering the history of the company which is launching its IPO.
- Investing in IPO shouldn’t be considered as earning quick returns, it should be viewed from a long-term perspective. As, when a company comes up with its IPO i.e. offering its shares for the first time to its investors, that time the prices might be low which in the longer term can grow exponentially and may offer you great returns as the company raises capital from public to grow in future, so it continues growing and offers you returns along with its growth. The fundamentally strong company offers good returns in the longer term than in the short term.
- The investment in IPO is very risky and the markets are often unpredictable. So, take an honest look at how much loss you can bear on your investment i.e. your risk appetite. Avoid getting too excited about every upcoming IPO.
IPO Investment Strategy
You can consider the following points while deciding on your IPO investment strategy:
> Read the IPO prospectus carefully to form an informed idea about the company’s business plan and its purpose for raising stocks in the market
> Research the company, its background, financials, and future aspects before you invest.
> Choose fundamentally strong companies
> Don’t make a decision based on the expectation of high short-term returns
> Ensure your risk appetite
> Buying IPOs, for the majority of buyers, isn’t investing—it’s speculating, because of listing gains/ earning quick money. But this isn’t the case every time as you may incur loss too.
The primary market has been quite busy since the start of 2021 and continued the momentum in 2022 too. Since last year many IPOs came up some of them have been listed below:
*Current gains are as of 2nd August 2022
To conclude, invest in fundamentally strong companies with a long-term perspective.
Choosing the right IPO is not an easy task, it needs aggressive research and the ability to predict the performance of the company in long term.
Invest wisely! it’s your hard-earned money.
If you haven’t started your investment journey yet then it’s the right time to start. You can begin to invest in Mutual Funds, as you get the benefit of professional fund management, and diversification across various securities and you can start investing with just Rs.100/-
You can check out LXME portfolios as they are well researched and curated by experts.
- What does IPO mean?
IPO stands for Initial Public Offering. When a company wants to raise capital, it offers its new shares to the public at large for the first time, after getting listed these can be traded in the secondary market.
- Can we invest in IPO through our bank account?
In case you are a retail investor, you can invest in IPO through Demat A/c which is linked to a bank account. However, HNIs can apply to an IPO directly through their bank account.
- Are IPOs always profitable?
No, IPOs might not always be profitable. One should not invest in IPOs by having the mindset of earning profits in short term. You should invest in fundamentally strong companies with a long-term perspective.
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