How to invest in IPO and why it is important for your personal finance?

An introduction to IPOs

A company is said to be launching an Initial Public Offering (IPO) when they sell a portion of their stake to the public for the first time. IPO is the process wherein the shareholders/directors of a private company or corporation decide to make privately held shares available to the public for the first time. 

Before the IPO, the shares of the company may be held by a closed group, including founders, founder's family and friends, investors like high net-worth individuals, angel investors, venture capitalists etc. Once the IPO comes out, the company gets listed on stock exchanges, and its shares can be owned and traded by retail and institutional investors. 

IPOs provide the opportunity to initial investors to sell a portion of their stake and monetise their investments. It is an opportunity for the company to raise fresh capital for the company to pay off debts and finance future expansion and growth plans. It also opens up the shareholding of the company and facilitates its free trading in exchanges.

Two types of IPO 

IPOs can be Fixed Price Offering or Book Building Offering. 

In a Fixed Price IPO, there is a fixed issue price for the shares offered. The investor pays the full price of the shares at the time of the IPO application. 

In Book Building IPO, the shares are offered with a 20% price band. The bids made by the investors determine the exact price of the shares. The lowest price is known as the floor price, while the upper price is called the cap price.

How can you invest in them?

Here is a walkthrough of the process involved in the investment of IPO. 

Selection of the IPO

In the case of listed companies, investors can refer to the company's track record and its share's performance while investing. But while selecting an IPO, you have to go through the prospectus of the company launching the IPO. After going through the information provided, you can decide whether or not you should invest in the company.

Arranging the funds

In a regular share trading activity, you can buy and sell even a single share. But to apply for an IPO, you have to buy at least one lot of shares or more. The size of your application influences the chances of your allotment, particularly in the case of an oversubscription of the IPO. You can delve into your savings or apply for a loan from a bank or NBFC to finance your IPO application. 

Demat cum trading account

Having a Demat cum trading account is a prerequisite for an IPO application and share trading in general. A Demat account is meant for storing your shareholdings in electronic form. To open a Demat cum trading account, you can approach a stock brokerage firm or online platform that provides this service. You will have to furnish KYC documents like PAN, Aadhaar, bank account, address and identity proofs to open a Demat cum trading account.

Application

IPO application involves the Application Supported by Blocked Account (ASBA) facility. ASBA allows your banker to block an amount in your bank account, which is equivalent to the application amount. For instance, if you are applying for 100 shares at an application price of Rs 100 each, your bank will block Rs 10,000 in your linked bank account through the ASBA facility. You can apply for IPO through ASBA application forms which are available in Demat as well as physically.

Bidding 

To bid for the IPO, you have to apply as per the lot size mentioned in the prospectus. You have to apply for at least one lot, which in turn is a collection of a specific number of shares. You have to bid at a price within the price range mentioned in the IPO. The ASBA will be activated as per your bid amount. You can subsequently revise your bid during the application period. 

Allotment

During the bidding process, there is a big possibility that the IPO is oversubscribed. It means that more shares have been applied for than are actually offered. In such cases, shares are allotted to the applicants on a pro-rata basis. So, if you apply for shares in an IPO that eventually gets oversubscribed, you may end up getting a lesser number of shares than what you allotted for. If you are allotted IPO shares, you will receive a Confirmatory Allotment Note, generally within six days from the closure of the IPO window. Further, seven days later, the shares will be listed in the stock market for the first time.

Why should you invest through IPO?

The prices of shares in the stock market reflect the company's financial and business performance and the market sentiment towards the share. This is why there are unusual spikes in a company's share price, followed by market corrections. In the case of IPO, the share prices are purely information-based. The fluctuations in the market don't affect the IPO share's price till it gets listed. Thus, IPO offers your investment a more transparent share pricing.

It often happens that the newly listed company's shares debut in the stock market at a higher price than the price band mentioned in the prospectus. The investor who has been allotted IPO shares can make an instant profit through share trading as soon as the shares get publicly listed.

For these reasons, investment in IPOs can be a big boost to your investment profitability. However, you must invest in IPOs only after studying the company thoroughly. Suppose you are looking to invest in IPOs. In that case, you can decide between Nykaa, Fino Payments Bank, PolicyBazaar, LIC, Bajaj Energy, Go Air, PayTm, Sriram Properties, Aadhar Housing Finance, Mobikwik, Studds Accessories, OYO and many more. 

Choose your IPO carefully, and you can raise your personal finance with the yields. Stay financially healthy and track all your expenses with the IDFC FIRST online banking app.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.