{"id":5214,"date":"2021-10-20T13:11:35","date_gmt":"2021-10-20T07:41:35","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=5214"},"modified":"2022-05-24T19:08:17","modified_gmt":"2022-05-24T13:38:17","slug":"ipo-investment","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/ipo-investment\/","title":{"rendered":"IPO Investment \u2013 Meaning, How To Buy IPO, Types of IPO and Eligibility"},"content":{"rendered":"\n<p>The <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/\">stock market<\/a> is one of the most lucrative investment avenues in India.&nbsp;Investors trade in the stock market either through the primary market or through the secondary market. Of the variety of options available for investing in the primary market, applying to the Initial Public Offering (<a href=\"https:\/\/www.tickertape.in\/blog\/all-you-need-to-know-about-ipos\/?utm_source=blog&amp;utm_medium=article\">IPO<\/a>) of a company remains the most attractive entry-point for investors, both short-term and long-term.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Understanding-initial-public-offering\" title=\"Understanding initial public offering\">Understanding initial public offering<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Process-of-IPO\" title=\"Process of IPO\">Process of IPO<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Why-does-a-company-offer-an-IPO\" title=\"Why does a company offer an IPO?\">Why does a company offer an IPO?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#What-is-book-building\" title=\"What is book building?\">What is book building?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#What-is-a-Draft-Red-Herring-Prospectus-DRHP\" title=\"What is a Draft Red Herring Prospectus (DRHP)?\">What is a Draft Red Herring Prospectus (DRHP)?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Advantages-and-disadvantages-of-investing-in-an-IPO\" title=\"Advantages and disadvantages of investing in an IPO\">Advantages and disadvantages of investing in an IPO<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Advantages-of-investing-in-an-IPO\" title=\"Advantages of investing in an IPO\">Advantages of investing in an IPO<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Disadvantages-of-investing-in-an-IPO\" title=\"Disadvantages of investing in an IPO\">Disadvantages of investing in an IPO<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"understanding\"><span class=\"ez-toc-section\" id=\"Understanding-initial-public-offering\"><\/span><strong>Understanding initial public offering<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>IPO stands for Initial Public Offering. It is the process by which a private company can go public by selling its shares to the public. With an IPO, the company gets its shares listed on the <a href=\"https:\/\/www.tickertape.in\/blog\/stock-exchange\/?utm_source=blog&amp;utm_medium=article\">stock exchange<\/a>.<\/p>\n\n\n\n<p>Before an IPO, a company is considered to be private \u2013 with a smaller number of <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a>, limited to accredited investors (like angel investors\/venture capitalists and high <a href=\"https:\/\/www.tickertape.in\/blog\/net-worth\/\">net worth<\/a> individuals) and\/or early investors (for instance, the founder, family, and friends).&nbsp;<\/p>\n\n\n\n<p>After an IPO, the issuing company becomes a publicly listed company on a recognized stock exchange that opens up a pre-decided quantity of shares for the public to trade. Thus, an IPO is also known as \u201cgoing public\u201d.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"process\"><span class=\"ez-toc-section\" id=\"Process-of-IPO\"><\/span><strong>Process of IPO<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The first thing that a company does before bringing an IPO is to hire a merchant banker to handle the process. An underwriting agreement is entered between the merchant banker and the company to work out the various financial details of the IPO.&nbsp;<\/p>\n\n\n\n<p>The merchant banker underwrites the company\u2019s shares by buying all or some part of the shares and selling them to the public. Later, both the parties file a registration statement with Securities and Exchange Board of India (<a href=\"https:\/\/www.tickertape.in\/blog\/securities-and-exchange-board-of-india-functions-powers-and-regulations-of-sebi\/?utm_source=blog&amp;utm_medium=article\">SEBI<\/a>) along with the underwriting agreement and necessary documents. <a href=\"https:\/\/www.tickertape.in\/blog\/securities-and-exchange-board-of-india-functions-powers-and-regulations-of-sebi\/\">SEBI<\/a> then studies the details of the report submitted, and if the information presented is found correct, a date is allotted to the company to announce its initial public offering.&nbsp;<\/p>\n\n\n\n<p>The initial listing fee of the company is Rs. 50,000 and depending upon the paid-up <a href=\"https:\/\/www.tickertape.in\/blog\/share-capital\/\">share capital<\/a> of the company, the subsequent annual listing fee is determined. The company determines the share\u2019s price band, and then the merchant banker offers its shares to the public.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"why\"><span class=\"ez-toc-section\" id=\"Why-does-a-company-offer-an-IPO\"><\/span><strong>Why does a company offer an IPO?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>An IPO is a money-raising exercise. Every company needs funds to expand, improve business, better the infrastructure, repay loans, etc. Raising capital helps the company grow, innovate, expand and take risks. Capital raised through banks and other financial institutions could be expensive and a drain on the company in the long term. So primarily, to avoid traditional borrowing, a company may go public. Also, IPOs can help determine a company\u2019s market capital structure.&nbsp;<\/p>\n\n\n\n<p>Once the company has \u2018gone public\u2019 and the stocks are doing well, it becomes easy for businesses to grow further. Going public means that the brand has gained enough success to get its name flashed in the stock exchanges. It is a matter of credibility and pride to any company.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-book-building\"><\/span><strong>What is book building?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>SEBI guidelines define book building as <em>&#8220;a process is undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up, and the price for such securities is assessed for the determination of the quantum of such securities to be issued through a notice, circular, advertisement, document or information memoranda or offer document&#8221;.<\/em><\/p>\n\n\n\n<p>Book building is a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism (when the IPO is open) where bids are collected from investors at various prices, some above and many equal to the floor price. The <a href=\"https:\/\/www.tickertape.in\/blog\/offer-price\/?utm_source=blog&amp;utm_medium=article\">offer price<\/a> is determined after the bid closing date.<\/p>\n\n\n\n<p>As per SEBI guidelines, an issuer company can issue securities to the public through prospectus in the following manner:<\/p>\n\n\n\n<ul><li>100% of the net offer to the public through the book-building process<\/li><li>75% of the net offer to the public through the book-building process and 25% at a price determined through book building.&nbsp;<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"draft\"><span class=\"ez-toc-section\" id=\"What-is-a-Draft-Red-Herring-Prospectus-DRHP\"><\/span><strong>What is a Draft Red Herring Prospectus (DRHP)?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A Red Herring Prospectus, the most important document for an IPO, is filed by a company to <a href=\"https:\/\/www.tickertape.in\/blog\/stock-exchanges-in-india\/?utm_source=blog&amp;utm_medium=article\">SEBI<\/a> when it intends to raise money from the public by selling shares of the company.&nbsp;<\/p>\n\n\n\n<p>The document is very useful to investors because it provides detailed information about the company\u2019s business operations, financials, promoters and the company\u2019s objective for raising funds by filing IPOs etc. It also elaborates on how the company intends to use the money raised and the possible risks for investors among others.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"investing\"><span class=\"ez-toc-section\" id=\"Advantages-and-disadvantages-of-investing-in-an-IPO\"><\/span><strong>Advantages and disadvantages of investing in an IPO<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages-of-investing-in-an-IPO\"><\/span><strong>Advantages of investing in an IPO<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ol><li><strong>Discounted price&nbsp;<\/strong><\/li><\/ol>\n\n\n\n<p>Investing in a company\u2019s IPO can give you a \u2018cheap\u2019 entry point, i.e., a price well below the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-the-intrinsic-value-of-a-stock-and-how-to-calculate-it\/?utm_source=blog&amp;utm_medium=article\">stock\u2019s intrinsic value<\/a>. Many investment banks that decide the initial subscription price of a company\u2019s share pre-listing offer the retail investors a sizeable discount to attract a larger pool of investors. Getting allotment in a credible business can reap multifold returns in the long run.<\/p>\n\n\n\n<ol start=\"2\"><li><strong>Listing day gains<\/strong><\/li><\/ol>\n\n\n\n<p>Although this is not a rule of thumb, companies that manage to create a notable hype pre-listing often witness block-buster listing day gains. This premium, in some cases, outperforms multi-year returns of certain legacy companies giving more incentives to investors to buy stocks early on.<\/p>\n\n\n\n<ol start=\"3\"><li><strong>&nbsp;Early entry point<\/strong><\/li><\/ol>\n\n\n\n<p>Every company seeking an IPO is doing so for a reason, i.e. they are amassing capital that can be re-invested in increasing capacity and production, introducing new product lines or exploring new markets. Whatever these initiatives may be, the business surely yields results of these investments over the long term. An investor who has entered a stock at the IPO stage can reap the benefits of these business decisions in the future.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Disadvantages-of-investing-in-an-IPO\"><\/span><strong>Disadvantages of investing in an IPO<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ol><li><strong>Lack of published financial statements<\/strong><\/li><\/ol>\n\n\n\n<p>Although every company heading for an IPO submits a detailed DRHP that publishes the company\u2019s audited financial statements over the last three to five years, the business dealings of a private company are, by and large, private. As an investor, you can conduct limited due diligence into the past business of a company pre-IPO, which can be viewed as a credible risk.<\/p>\n\n\n\n<ol start=\"2\"><li><strong>Limited visibility into the corporate structure<\/strong><\/li><\/ol>\n\n\n\n<p>Many private companies\u2019 corporate structure, from a pre-existing familial structure, may not suit larger corporations. Moreover, the transition to a more formal corporate governance may have a visible impact on the company\u2019s business; this inexperience may cost investors their money.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>IPO investments are generally considered by retailers for listing and short-term gains. An investor must not be blinded by the mammoth IPO success of the likes of a <a href=\"https:\/\/www.tickertape.in\/stocks\/paras-defence-and-space-technologies-PARAS?&amp;utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Paras Defence and Space Technologies<\/a> or a <a href=\"https:\/\/www.tickertape.in\/stocks\/zomato-ZOM?&amp;utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Zomato<\/a>.&nbsp; IPO majorly run on market moods, for instance, a <a href=\"https:\/\/www.tickertape.in\/blog\/bull-market\/\">bull market<\/a> will help even a dull IPO shine out. Hence, one must be watchful of IPOs, as many also sub perform, which again can affect your gains.<\/p>\n\n\n\n<p>If you are new to investment field and are looking for the right time to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a>, <a href=\"https:\/\/www.tickertape.in\/blog\/muhurat-trading-2021\/?utm_source=blog&amp;utm_medium=article&amp;utm_campaign=mtrad\">Muhurat Trading<\/a> is your perfect chance. This Diwali, start your investment journey by investing during the shubh muhurat. You can start by screening stocks using <a href=\"https:\/\/www.tickertape.in\/screener?&amp;utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Tickertape&#8217;s Screener<\/a>, and adding them to your watchlist.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Wondering how to invest in an IPO? Click here to read about the IPO investment process, terms associated with it, when to invest and how to select the right IPO!<\/p>\n","protected":false},"author":54,"featured_media":4913,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[9,1727],"tags":[],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/10\/3.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5214"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/54"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=5214"}],"version-history":[{"count":3,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5214\/revisions"}],"predecessor-version":[{"id":8729,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5214\/revisions\/8729"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/4913"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=5214"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=5214"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=5214"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}