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Initial Public Offering: Ultimate Guide to Investing in IPO

Initial Public Offering: Ultimate Guide to Investing in IPO

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What is Initial Public Offering?

The process by which a privately owned business gets listed as a publicly traded Company by issuing its stock to the public for the first time is known as Initial Public Offering (IPO). A business has a limited number of stockholders before an IPO, mostly the founder members and angel investors. The general public cannot acquire company shares as a retail investor unless the company agrees to go public. 

People often refer to an IPO as going public since, after an IPO, they can give a part of their shares for trading on the stock market. To purchase shares in an unlisted private firm, one can reach the business’s owners, but they are under no obligation to give their stocks.

Types of IPO

Companies can offer two types of IPOs- Fixed price offerings or Book building offerings.

  1. Fixed Price Offering: In this type of IPO offering, the issuer company determines the cost of the shares. Investors seeking engagement in a Fixed Price Offering investment must buy the shares at a pre-determined price.
  2. Book Building Offering: Issuer Companies offer IPO investment through auctions, taking bids before the ultimate price is determined. In addition, the company conducting an IPO specifies a 20% price range on the share price

Why should you invest in an IPO?

Investing in IPOs comes with a long list of benefits. However, the following benefits usually attract a large number of investors in India when a private company decides to offer its shares in the initial public offering: 

  1. Long-Term Benefits: Investing in the IPO of companies can provide an opportunity to reap sizeable returns over time. If the IPO company does well, it’s share price grows, and investor could earn profit from the shares they own.
  2. Opportunity To Get In Early: The initial public offering (IPO) is the first time a company’s shares are made available to the general public. As a result, investors have an excellent opportunity to get in early before stocks become pricier. IPOs can extract immediate advantages in a short time, or investors can also hold their positions for extended periods.
  3. Claim Listing Gains: Listing gains occur when a company goes on the stock exchange with an offering price more than the allocation price. Typically, investors anticipate an IPO investment to do well upon listing owing to variables such as market demand. However, it is crucial to note that it is not guaranteed. Long-term investors must invest in a company that can provide substantial profits in five or even ten years.

Choosing an IPO to invest in

When determining which Initial Public Offerings to invest in, there are a few aspects to consider, such as ease of liquidity, the size of ownership stake you get for your investment, potential growth and value, risks associated with the company, and the cost of IPO investment and taxes.

However, before investing in an IPO of companies, one must understand that not all IPO investments are fruitful. Some might open on the stock exchange even below the issue price. Therefore, evaluating the company’s profile before an initial public offering is a must. 

  1. When opting for an IPO investment, one should be clear that the enterprise is not obligated to return the funds to the investors.
  2. The IPO company provides a prospectus available to the public. Before making an IPO investment, thoroughly examine and study all of the postulates in it.
  3. A large proportion of shares owned by institutional investors and banks in the Red Herring Prospectus could be a favourable indicator, reflecting their trust in the firm. The prospectus is available on the SEBI website.
  4. Pay close attention to examining an IPO company before investing in it. It ensures an understanding of the company’s business strategy. This helps determine if the company has a strong competitive edge required for success.

Conclusion

A company’s initial public offering (IPO) is a unique prospect for investors to participate in the growth of a business and perhaps generate profits. The current spike in demand for IPOs has rendered them an appealing investment possibility. Investing in recently launched public firms can be tremendously profitable; however, one must be aware of the risks and understand that earnings are not assured. After examining the business, its management, future strategy, etc., you can explore investing in an IPO company.

Marwadi makes it easy to invest in IPO firms. Every month, numerous initial public offerings go up on the stock market. You can keep up with them by following our frequent blog and social media updates. To begin your investment adventure, just register with our experts to open an IPO account with us and begin investing in your preferred company.

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