when a privately held company raises money from the public and then distributes shares to the public. The shares are then exchanged on the stock market for the first time. The action is called to as an initial public offering.

Why companies go public ?

To raise capital, companies go public. It provides them with capital that they can use to pay off debts, upgrade their infrastructure, invest in the development and research of new products, market those products, and other things. In addition, they will receive better interest rates on their debt when they issue it due to the increased financial scrutiny during the process of going public.

Alternatively, there is always scope for mergers and acquisitions if the company's stocks are in high demand. Negotiation terms may be expressed in stocks. The company's top talent is drawn to the demand as a result of the ability to provide stock options as compensation. Once the company is listed on the stock exchange, it gains credibility and visibility.

Who are underwriters and what do they do ?

A few representatives from investment banks are sent to the company that wants to sell its shares on the open market for the first time. They devise the entire procedure for them in order to guarantee a successful entry into the market. How the underwriter is paid will determine how much risk he takes. Two methods of underwriting exist.

Bought deal - Here, the underwriters purchase all initial public offerings (IPOs) from the company and then sell them to the investing public. The difference between the selling and buying prices is the compensation. The underwriters are entirely responsible for the outcome of the IPO listing.

Best effort deal - The underwriters will use their best efforts to market the issue to the investing public in accordance with this agreement. They don't buy any stock from the corporation. There is a set compensation. Additionally, underwriters have nothing to lose and nothing to gain even if the shares perform well after the IPO.

Registration with SEBI

All businesses that want to go public must submit an S-1 form to SEBI. A company and its investment bank complete the registration statement by giving SEBI all information related to the company's finances and the IPO. The information that must be included in the registration statement is as follows:

The organization's business plan

financial records of the company, including its income statements and balance sheets

The investment's possible risks

the IPO of shares

The way the money was spent

Comparison analysis of the financial position and objectives of the company

SEBI will make sure the potential investor has access to all the necessary information before making an investment in an IPO. This business was established with the investor's best interests in mind.

Roadshows

The roadshow stage of an IPO entails a number of meetings and marketing initiatives with prospective investors and brokers. This is done by the Company and its underwriters in advance of the IPO release. It creates interest in the IPO. This phase sees a lot of pre-IPO sales. Shares are issued to qualified institutional buyers at the price that the company executives are able to persuade them to accept.

Roadshows are solely marketing strategies used to raise awareness of IPOs and build brand recognition. If the company is successful in convincing the investors to purchase their shares, they will be present in numerous cities. As investors supporters of their brand.

Lock-up period

Lock-up periods are typically agreements between the company issuing the stocks, the company's insiders, and pre-IPO stockholders that limit their ability to sell their shares for a specific amount of time. This serves to safeguard the general public from pre-IPO investors who wish to sell off their holdings when the IPO is overpriced, which would otherwise result in a decline in market value due to the influx of shares.

Flipping

Flipping is when the investor who receives the share sells it on the day the stocks are listed on the stock market in order to realise a profit immediately. Flipping is what starts the trading even though it has the potential to drastically lower the share price when done in large quantities.

What is IPO & How to Invest in IPO in India ?

IPO stands for Initial Public Offering. It is a procedure by which a privately held company transitions into a publicly traded company by first releasing its shares to the general public. When a small group of shareholders owns a private company, the ownership is divided when the company goes public and trades its shares. The company lists its name on the stock exchange thanks to the IPO.

How Does a Company Offer an IPO?

Before going public, a company appoints an investment bank to handle the IPO. In the underwriting agreement, the investment bank and the company work out the IPO's financial specifics. They later submit the registration statement to the SEC along with the underwriting agreement. The SEC examines the disclosed information and, if found accurate, approves a date for the IPO announcement.

Why Does a Company Offer an IPO?

1. Launching an IPO is a profitable endeavour. Every business needs money, whether it's for growth, improving their operations, investing in better infrastructure, paying back loans, etc.

2. Trading stocks publicly results in more liquidity. It makes room for employee stock ownership plans, such as stock options, and other compensation schemes, which draw in the cream layer's most talented individuals.

3. When a business goes public, it demonstrates that it has achieved sufficient success to have its name displayed on stock exchanges. Any company's credibility and pride are at stake.

4. A publicly traded company can always issue more shares in a competitive market. This will open the door to mergers and acquisitions because the shares can be issued as part of the agreement.

Types of IPOs

If you are a beginner investor, you might find the initial public offering jargon to be a little perplexing. There are two main types of IPOs that companies offer, in order to put your confusion to rest.

Fixed Price Offering

Simple fixed price offers are available. The price of the initial public offering is disclosed in advance by the company. Therefore, you commit to paying the full price when you participate in a fixed-price initial public offering.

Book Building Offering 

In a book building offering, a 20 percent band of the stock price is made available, and potential investors place their bids. The floor price and cap price refer to the lower and upper limits of the price band, respectively. Investors place bids for the number of shares they want and the price they are willing to pay. Before announcing a final price, it enables the company to gauge investor interest in the initial public offering.

Should You Invest in an IPO?

It can be difficult to decide whether to invest in an IPO of a young company. A good attitude to have in the stock market is scepticism.

Background checks

Since the company is just now going public, it is clear that there is not enough historical data to support your choice. The information in the prospectus about the IPO details is a red herring, so you should carefully examine it. Understand the fund management team's goals for utilising IPO-generated funds.

Who is funding?

Underwriting is the process of raising funds by issuing new securities. Be wary of small investment banks' underwriting. They may be willing to back any company. Typically, a successful IPO is backed by large brokerages with the ability to endorse a new issue well.

Lock-up Periods

IPOs frequently experience a severe downtrend after going public. The lock-up period is to blame for the drop in share price. A lock-up period is a contractual provision that specifies the time period during which company executives and investors are not permitted to sell their shares. Following the expiration of the lock-up period, the share price falls.

Flipping

Flippers are people who buy stocks in a company that is about to go public and then sell them on the secondary market to make quick money. The trading activity is started by flipping.

This few things to consider before investing

1. If you purchased an IPO for the company, you are exposed to its fortunes. You have a direct impact on its success or failure.

2. This asset in your portfolio has the greatest potential to reward returns. On the other hand, it can sink your investment without warning. Remember that stocks are subject to market volatility.

3. You should be aware that a company that sells its stock to the public is not obligated to repay the capital invested by the public.

4. Before investing in an IPO, consider the potential risks and rewards. If you are a beginner, read an account written by an expert or a wealth management firm. If you are still unsure, consult with your personal financial advisor.

How to apply for IPOs

Because of the online application process, it is now easier to apply for an initial public offering. However, if you are a new investor, you should first educate yourself.

The first and most important consideration is funding. You will have to make a payment in advance, whether it is a fixed price or a book building IPO, and you must have funding ready. Investors can use their own funds or obtain a loan from a bank or NBFC.

However, you cannot invest in stocks without a DEMAT account. So, the next step is to open a DEMAT account. To obtain a DEMAT, choose a reputable broker with a proven track record.

You can use the DEMAT account to receive all kinds of investment instruments, including gold bonds, corporate bonds, shares, and more.

The online application process is simple. You can do it through the broker's investor portal or by downloading the ASBA form from your bank's net-banking platform.

ASBA is an acronym that stands for Application Supported by Blocked Account (ASBA). It allows banks to block funds in the applicant's account in response to your IPO bid.

If you apply through a broker, you must pay using UPI-enabled payment gateways. Cheques and demand draughts are not accepted for bidding in either case.

Conclusion

An investor can choose whether or not to invest in an initial public offering, but it is one way to increase the earning potential of your investment. Choosing the right IPO offer can be difficult, but if you succeed, IPOs can be the most valuable asset in your portfolio.