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Investing in IPOs can be a smart move if you are an informed investor. Though, every IPO is not a great opportunity. it has benefits and risks together. Before you enter the bandwagon, it’s important to know what is an IPO? and how to invest in it?. Now we will answer both of these questions.
What is an IPO?
Initial Public Offering (IPO) can be defined as the process in which a private company or corporation can become public by selling a portion of its stake to the investors. It is generally initiated to infuse the new equity capital to the firm and facilitate easy trading of the existing assets and raise capital for the future or to monetize the investments made by existing stakeholders. Once the IPO is done, the shares of the firm are listed and can be traded without restriction in the open market. The stock exchange imposes a minimum free float on the shares both in absolute terms and as a ratio of the total share capital.
How to invest in an IPO?
1. Decision
The first step is to decide the IPO the investor wants to apply for. Through expertise investors, it can be intimidating for the new ones. The investors can form a choice by going through the prospectus of the companies initiating IPO. This helps the investors to form an informed idea about the company’s business plan and its purpose for raising stocks in the market. After the investor makes his decision, he needs to look forward to the next step.
2. Funding
After the investor forms the decision concerning the IPO, he would like to invest in it. The next step would be to arrange the funds. He can use his savings to buy a company’s share. If the investor does not have enough savings then he can avail of a loan from certain banks and Non-Banking Financial Organisations (NBFCs) at a definite rate of interest.
3. Opening a Demat-cum-trading account
Without a Demat account, no investors can apply for the IPO. Demat account’s function is to provide the investors with the provision to store shares and other financial securities electronically. Demat account can be opened by submitting an Aadhar Card, PAN card, address and identity proofs.
4. The application process
An investor can apply for an IPO through his bank trading account. Few financial organizations will offer the provision to brunch your Demat, trading and bank accounts. Those investors who created Demat trading account must be familiar with the Application Supported by Blocked Account (ASBA) facility. This facility is an application that enables the banks to arrest funds in the applicant’s bank account. These forms are made available to the IPO applicants in both Demat and physical form. Although, the use of cheques and demand drafts can’t be made to avail the facility. The investor needs to specify his Demat account number, PAN, bidding details and bank account number in the application.
5. Bidding
An investor needs to bid to apply for the shares in an IPO. It is done as per the lot size quoted in the company’s prospectus. Lot size means the minimum number of shares that an investor has to apply for the IPO. The investor needs to bid within the price range that is decided. However, the investor can revise his bidding during an IPO, and he should note that he needs to block the required funds while bidding. On the other hand, the arrested amount in the banks earns interest until the process of allotment is initiated.
6. Allotment
In most cases, the demand for the shares can exceed the actual number of stocks released in the secondary market. The investor can also face situations where he can get a lesser number of shares than what he had demanded. In such cases, the banks unblock the arrested funds either entirely or partially. If the investor gets full allotment, he would receive a CAN (Confirmatory Allotment Note) within six working days after the IPO process is done. After the shares are allotted, they are credited to the investors’ Demat account. If all these steps are carried on successfully, the investor will have to wait for the listings of the stocks in the share market. This process is generally done within seven days after the shares are finalised.