Investing in the stock market may seem overwhelming at first, but understanding basic concepts like an IPO (Initial Public Offering) is a great starting point. If you’ve ever wondered how companies get listed on the stock exchange or how you can invest early in them, this blog will walk you through everything you need to know — in simple, clear terms.
What is an IPO?
An IPO (Initial Public Offering) is the process through which a private company becomes a publicly traded company by offering its shares to the general public for the first time.
Think of it as a company’s big debut — its first step into the world of public investments.
Before an IPO, the company is privately owned by a few investors such as founders, family, and venture capitalists. After the IPO, its shares are available for purchase by any retail or institutional investor via the stock exchanges like NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) in India.
Why Do Companies Launch an IPO?
There are several strategic reasons why a company decides to go public:
1.
Raising Capital
One of the main reasons is to raise funds for business expansion, product development, paying off debts, or acquiring other companies. This capital helps fuel growth without taking on more loans.
2.
Liquidity for Existing Shareholders
Founders, early investors, and employees can convert some of their shares into cash by selling them on the stock market.
3.
Brand Visibility and Credibility
Going public puts the company under the spotlight, increasing its brand recognition and trust among consumers, partners, and stakeholders.
4.
Better Valuation
Stock market listing often leads to a market-driven valuation, which can be higher than private valuations due to investor demand.
How Does an IPO Work? A Step-by-Step Overview
- Hiring Investment Bankers
Companies appoint underwriters (usually large investment banks) to manage the IPO process, structure the offer, and determine the price range. - Filing the DRHP
A Draft Red Herring Prospectus (DRHP) is submitted to SEBI (Securities and Exchange Board of India). This document contains vital information like the company’s financials, business model, and IPO objectives. - Approval from SEBI
SEBI reviews the DRHP and once satisfied, gives the green light for the IPO. - Price Band & Bidding
The company, in consultation with the underwriters, announces a price band. Investors can place bids within this range during the subscription period. - Allotment of Shares
After the subscription window closes, shares are allotted based on demand. In oversubscribed IPOs, shares are allotted via a lottery system. - Listing on Stock Exchange
The final step is listing the shares on the stock exchange — typically within a week from the allotment. Post listing, shares are available for trading just like any other stock.
How Can You Apply for an IPO as an Investor?
Applying for an IPO is easier than ever before, thanks to online platforms. Here’s how you can participate:
✅
Using ASBA (Application Supported by Blocked Amount)
This is the most common and secure method. You apply through your bank or stockbroker, and the money gets blocked in your account until shares are allotted. If you don’t get any shares, the blocked amount is automatically released.
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Through Demat & Trading Accounts
You must have a Demat account (to hold shares) and a trading account (to place orders). Platforms like Zerodha, Groww, Upstox, Angel One, etc., allow direct IPO applications via UPI or net banking.
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Via UPI
UPI is now the go-to method for retail investors. You enter your UPI ID during application, and approval requests come on your UPI app.
Benefits of IPOs
Let’s break it down for both companies and investors:
🔷
For Companies
- Access to huge capital without borrowing.
- Improved credibility and market presence.
- Easier to attract top talent with stock options.
- Opportunity to use shares for future acquisitions.
🔷
For Investors
- Early access to high-growth companies.
- Potential for listing gains (if stock lists at a premium).
- Long-term wealth creation if company performs well.
- Portfolio diversification.
Things to Keep in Mind Before Investing in an IPO
- Read the DRHP carefully to understand the company’s fundamentals.
- Don’t apply just because of hype — always assess the valuation, business model, and industry risks.
- Understand that listing gains are not guaranteed. Many IPOs may list at a discount or underperform post-listing.
- Invest based on your risk appetite and goals.
Conclusion
An IPO can be a great opportunity — both for the company seeking growth and for investors hoping to enter early into a promising business. However, like any investment, it comes with its own set of risks. The key is to stay informed, do your research, and avoid following the crowd blindly.
Whether you’re a first-time investor or someone looking to build a more robust financial future, learning how IPOs work is a valuable step in your stock market journey.
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