What is IPO And How Does IPO Work?

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what is an ipo in india

In 2017, India recorded as many as 36 IPOs. Due to this, organization’s were able to raise a record Rs.67,147 crores. They recorded this much in the equity market via IPOs. Now, with this record, you might wonder what made companies raise this much money and what is an IPO. You are in the right place to know more about it here:

What does IPO mean in stocks?:

IPO is the short form for the phrase Initial Public Offering. In this concept, a private company lists its shares on a stock exchange. By doing this, the company makes its shares available for the general public to buy. 

Many people feel that IPOs are big-money-making opportunities. They also feel that high-profile businesses get a place in headlines with huge share price gains. They achieve this when they make their shares available for the public to buy. Of course, they are trendy. Nevertheless, IPOs are risky investments. They are known for delivering inconsistent returns in the long run. Of course, some of them are beneficial. This is why experts say that in IPOs risks and benefits go hand-in-hand.

You can understand IPO as a process, where a private company looks to get help from the public. You might wonder how the IPO can help private companies. The company gets money from the public by selling a portion of its shares. In turn, the company can make some money. 

The public, individuals with high net worth and even institutional investors can do one thing. They can know the details of the initial sale of shares in the prospectus of a company. It is nothing but a lengthy document that provides the details of the proposed offerings.

Once a company does an IPO, its shares are listed and traded freely in the open market. As the company lists its shares in the stock exchange, the exchange will impose a lesser fee on the shares. The exchange can do this either as a ratio of the total share capital or in absolute terms. In some instances, stock exchanges can follow both these approaches.

What is The Purpose of IPO:

What is IPO

Any company, be it young or old can decide to go public. With this decision, the company moves forward to get itself listed in a stock exchange. When they do this, the company can make its shares available to the public by IPO. With the funds that the company gets by selling its shares, the company can raise equity capital. The company has the option to issue new shares through IPOs. Otherwise, the company’s existing shareholders can also sell their shares to the public. In this case, the company cannot raise any fresh capital.

Companies choose IPO as the option to raise capital because they need not have to repay the capital to the public investors. Here, the company that issues its shares is referred to as the issuer. The company can do this with the help of investment banks. After the IPO, the business’s shares will be traded in the open market. Investors can again sell those shares through secondary market trading. 

Apart from raising capital, companies go public to gain popularity as well.

Some Key IPO Terms:

Now, you have an idea of what an IPO is. When you are in this market, it would be good to understand some common IPO Terminologies. Here are a few of them:

Underwriter:

An underwriter is the investment bank that manages the public offerings of an issuing company. This person or entity is responsible for deciding the issue price of shares. Even, the underwriter takes care of the task of assigning shares to investors. The investment bank also assigns shares to investors.

What is IPO Price Band:

The price band is nothing but the price range in which investors can bid for IPO Shares. In general, the price is different for each category of investor. For instance, retail investors like you will pay a different value. But, a qualified institutional buyer might pay a different value for the shares.

What is IPO Lot Size:

This term denotes the smallest number of shares that you can bid for in an IPO. Let us consider that you wish to buy more shares. In this case, you will have to bid in multiples of the lot size.