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IPO – The IPO guide to beginner

“An IPO is not the end but actually the beginning

– Nithin Kamath, Zerodha.

Want to know about IPO ?

Are you ready to start investing in Initial Public Offering ?

If yes. Read this.

What is an IPO in the share market ?  Want to know how an IPO works? Your vision today to build a good portfolio of stocks will start from applying to good companies’ IPO.

Let us understand what is Initial Public Offering ? How it works in the view of the investor’s perspective?

Why does a Company go Public?

When private companies want to expand their business, they will raise the funds from retail investors, institutional investors and HNIs by offering their company’s shares through Initial Public Offerings. Basically, the company is giving up a part of its ownership to stockholders.

IPO - The IPO guide to beginner

Things to understand before investing in IPO

Is IPO a good investment

Investing in an IPO is a good option, but you must know that not every IPO is worth investing in. Here are a few things to remember while considering an IPO.

What are the details you should look before applying for an IPO ? Check the following details:

  1. Name of the Company
  2. Companies Financial position
  3. Board members of the Company
  4. Purpose of Fund raise.
  5. If it is a manufacturing company, check for the demand and supply of goods they are manufacturing. If it is service oriented, whom they are providing their services and what type of service is offered by the company.
  6. Past performance of the company
  7. Audited report
  8. How much amount the company is planning to raise through an IPO. 
  9. Type of shares issued.
  10. What is the price band

A checklist for investing in IPO

What is basic requirement you should have to bid in IPO :

  1. Having PAN card is must
  2. Valid demat account
  3. Bank account 

There are 2 types of IPOs. 1. Fixed Price IPO wherein company fixes the IPO price in advance. The price will be the total of par value and the premium. Bidder can apply with the fixed price rate announced by the company.

2. Book built issue. Here, the company will provide a price range for the IPO. Bidder can apply within this price range. The final price of the IPO will be arrived only through the book building process.

For more details, check this How to Bid for an IPO – Tips and Tricks

Bidding for IPO can be done through Offline or Online method. In case of Offline, a physical form is filled up and submitted to an IPO banker. In case of online application, your broker will provide you an interface through which you can fill in your application details. In this case, many of your details will be fetched from your demat account.

What is face value in IPO

What is the payment procedure for an IPO

The best practice to apply for an IPO is through Netbanking ASBA (Applications Supported by Blocked Amount)  service provided by your bank. The following details have to be provided in your application:

  1. Demat ID –  This is a 16-digit number used to identify your demat account. It is unique for every client. You can find your demat ID under DP IDs. If your demat account is with NSDL, then the number starts with “IN” followed by a 14 digit numeric code. Whereas in CDSL, it is only a 16 digits numeric code.
  2. Depository -( CDSL Central Depositories Services (India) Limited ) / NSDL (National Securities Depositories Limited)
  3. DP (Depository Participant )Name – Where your demat account is opened.

In ASBA system, bidder application money will be blocked and will be debited from the bank account only if you get allotment of the shares.

What is Price Band in IPO :

Company will set an offer price to bid the shares as upper limit and lower limit within which investors are able to bid. The Company in consultation with Merchant bankers will decide on the price band. The price band is arrived at based on factors like, growth factors of the Company, EPS (Earning per share) and Company net Worth etc.

The bottom band is the lower limit and the top band is known as the upper limit. Once a price band is  arrived, Offer document/prospectus will be sent to potential investors of all categories.

What is face value in IPO :

The face value is also known as par value. It is the nominal price set by the issuer when the stock is first issued. The face value can be Re.1, Rs. 2, Rs.5, Rs.10 and Rs. 100 also. Company will add premium to the face value which is the price band while offering in an IPO.

Bidding Option : You are allowed to place upto 3 bids within the range of price band in an IPO application. For Ex. The price range is 1000 to 1010. You can bid as

Bid 1. 50 shares at Rs. 1000

Bid 2. 50 shares at Rs. 1005

Bid 3. 50 shares at the cut-off

The usual practice of retail investors is to apply for shares with the cut-off price. A cut-off price is an offer price finalised by a company in consultation with the book running lead manager. Cut-off price will be anything within the price band and is different from floor price which is again minimum bid price.

As per the guidelines, Public issue must be subscribed by at least 90% for it to list. Though the support of underwriters to the issue is available, the issue has to comply with the minimum subscription limit. Otherwise, the IPO will be cancelled and the amount will be returned to the bidders.

IPO share allotment is basically done in 3 categories. That is, Retail, HNI and Institutional investors. Chances of getting allotment as retail investor is more, SEBI guidelines always ensure that retail investors get more allotment.

The entire process will take 10 – 12 days for the finalisation of basis of allotment and crediting the shares in respective allottees demat account.

IPO listing date :Once the above procedure is over, Company shares will be listed in the stock exchanges.

The Public Issue is said to be oversubscribed when the number of applications / applied  quantity of shares are higher than the  shares available for allotment. In such cases 3 basis of allotment will be prepared based on the different category of bidders. One basis of allotment will be selected as a lucky draw and accordingly shares will be allotted to the bidders.

As an investor, you have to keep an eye on upcoming IPOs and their credentials. So, you don’t miss the chance. You will also get the information about Upcoming IPOs and Current IPO  in NSE , BSE and moneycontrol website etc.

How can you increase chances of your IPO allotment

  • Always bid for small quantities
  • Apply with different Demat Account
  • Always stick to cut-off price
  • Check subscription status 
  • Apply well within the time. Avoid submission of application at last minute
  • Be cautious about technical rejections 

Most common reasons behind not receiving an IPO allotment

  • IPO Oversubscription 
  • Basis of allotment . lottery system
  • Invalid Application.
  • Bid Price is lower than the Issue Price.
  • Technical mistakes while submitting the Application Form.
  • Insufficient Fund in the bank account

Indian share market is booming. Many startup companies are making their way big by coming to Public. As per economic analysts and technical gurus, Indian share market is the best choice to invest and build wealth in the long run.

You can take a bid by applying for good companies IPOs. Invest wisely.

If you want to know why new traders in stock market lose money click here 

What is price band in IPO

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If you are interested to know more about stock market, commodity market, Option trading and share trading, stay connected to my blogs.

Stock Market Strategies

Basic question any investor may have. The best answer is,
1.Learn what is stock trading.
2.Observe the momentum of stock market.
3. Understand your risk apetite
4. Invest wisely
5. Have Patience

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