Investing in an Initial Public Offering (IPO) can be an exciting way to enter the stock market. When a company offers its shares to the public for the first time, it opens up a new opportunity for investors to own a part of its business.
However, for beginners, the IPO process can often seem confusing. There are many terms, rules, and steps involved that you need to understand before applying. This guide will walk you through the essential things every beginner should know before investing in an IPO, helping you make informed decisions.
Understanding Key IPO Terms
Before you jump into applying for an IPO, it’s important to get familiar with some basic terms that you will encounter frequently.
- IPO (Initial Public Offering): This is the first sale of a company’s shares to the public. It helps the company raise funds for growth, expansion, or paying off debts.
- Prospectus: A detailed document issued by the company that provides information about its business, financial health, risks, and the IPO details. It’s your primary source of information to understand the company.
- Abridged Prospectus: A shorter version of the full prospectus that highlights the main points.
- Underwriter: Usually, an investment bank or financial institution that manages the IPO process. They help set the price, market the shares, and sometimes buy unsold shares.
- Price Band: The range within which the company offers its shares during the IPO. Investors can place bids anywhere within this band.
- Book Building: The process where bids are collected from investors at different prices within the price band to determine the final IPO price.
- Bid Lot: The minimum number of shares you can apply for in one go.
- Basis of Allotment: The method used to distribute shares among investors if the IPO is oversubscribed (meaning demand exceeds supply).
- ASBA (Application Supported by Blocked Amount): A facility that allows your application money to be blocked in your bank account until shares are allotted, ensuring your money isn’t debited upfront.
- Demat Account: A digital account where your shares are held electronically. You need this to receive and trade shares.
Steps to Apply for an IPO
Once you understand the terminology, the next step is to know how to actually apply for an IPO.
- Eligibility: You must have a valid Demat account and a linked bank account. A PAN card is mandatory for identification and tax purposes.
- Application Process:
- Online: Most investors apply online through their broker’s platform, bank websites, or stock exchanges. This is the easiest and fastest way.
- Offline: You can also apply by filling out a physical application form available at your bank or broker’s office.
- Payment Method: The ASBA facility is widely used for secure payment. When you apply via ASBA, the application money is blocked in your bank account but not debited until shares are allotted. This ensures you don’t lose money if you don’t get shares.
- Application Window: IPOs are open for a limited time, usually 3 days. You must apply within this period.
- One Application Per PAN: Remember, you can submit only one application per PAN number. Multiple applications with the same PAN will be rejected.
Research and Due Diligence Before Applying
Applying for an IPO should never be a rushed decision. It’s crucial to do your homework before investing your hard-earned money.
- Read the Prospectus: The prospectus contains vital information about the company’s business model, financial statements, promoters, risks, and how the raised funds will be used. This document helps you assess whether the company is a good investment.
- Evaluate the Business: Understand what the company does and its growth potential. Is it in a growing industry? Does it have a competitive advantage?
- Financial Health: Look at the company’s revenue, profits, debts, and cash flow. A company with strong financials is generally a safer bet.
- Risks: Every investment carries risks. The prospectus will list the risks specific to the company and the industry. Make sure you are comfortable with these risks.
- Market Sentiment: Sometimes, IPOs get hyped, and prices may be inflated. Avoid investing based solely on hype or peer pressure.
What Happens After You Apply?
Once you have submitted your IPO application, here’s what happens next:
- Allotment Process: After the IPO closes, the company and underwriters review all applications. If the IPO is oversubscribed, shares are allotted based on the basis of allotment, which could be a lottery or proportional allocation.
- Refunds: If you don’t get all or any shares, the blocked money in your bank account will be released.
- Share Credit: Shares allotted to you will be credited to your Demat account within a few days after the IPO closes.
- Listing Day: The company’s shares get listed on the stock exchange, and you can start trading them in the secondary market.
Conclusion
Applying for an IPO can be a great way to participate in the stock market, but it requires careful preparation and understanding. From learning the key terms to following the application process correctly and doing thorough research on the company, every step matters. And, if you don’t have a Demat account yet, consider opening one with a trusted broker like Dhanush by Ashika.
