Investing in the stock market can be an exciting yet overwhelming experience, especially for beginners. One of the most talked-about opportunities in the stock market is an Initial Public Offering (IPO). But is an IPO the right choice for someone just starting their investment journey? Let’s dive deep into what IPOs are, how they work, and whether they’re a good option for beginners.
What is IPO in the Share Market?
When a private company decides to offer its shares to the public for the first time, this process is called an Initial Public Offering (IPO). This process transforms the company from a privately-owned business into a publicly-traded one listed on stock exchanges like the NSE (National Stock Exchange) or BSE (Bombay StockExchange).
Think of it like this: A company wants to grow or needs funds for specific goals like expanding its operations or repaying debts. Instead of borrowing money, they sell small ownership stakes (shares) to the public. When you buy these shares, you essentially own a piece of the company.
How Does an IPO Work?
The IPO process may sound complex, but let’s break it down step by step to make it simple:
- Decision to Go Public: The company’s management decides it’s time to raise money by offering shares to the public.
- Hiring Underwriters: The company hires financial experts, called underwriters (usually investment banks), to help them with the IPO process.
- SEBI Approval: The company prepares a detailed document called the Draft Red Herring Prospectus (DRHP) and submits it to SEBI (Securities and Exchange Board of India). SEBI reviews this document to ensure everything is in order.
- Price Setting: The company and underwriters decide how much each share will cost. This could either be a fixed price or a price range (price band).
- Public Bidding: Once approved, the IPO opens for the public. Investors submit their bids either at the fixed price set by the company or within a specified price range.
- Allotment of Shares: After the IPO closes, shares are allotted to investors based on demand.
- Listing on the Stock Exchange: Finally, the company’s shares are listed on stock exchanges, and you can start trading them.
Types of IPO
There are two main types of IPOs, and understanding them will help you decide how to approach your investment:
- Fixed Price IPO:
In this type, the company offers its shares at a pre-decided price.
You know exactly what you’ll pay per share before placing your application.
- Book Building IPO:
Here, the company offers a price range (e.g., INR 100 to INR 120 per share), and investors bid within this range.
The final price is determined based on the bids received.
Is IPO Good or Bad?
The performance of an IPO can vary based on different factors. Let’s discuss the pros and cons:
Why IPOs Can Be Good:
- Opportunity for Early Gains: Many IPOs list at a premium, giving investors quick profits.
- Growth Potential: Buying shares during an IPO means you’re investing in a company early in its public journey, which can lead to significant returns in the long run.
- Transparency: Before launching an IPO, companies are required to disclose detailed financial and operational information, making it easier for you to analyze them.
Why IPOs Can Be Risky:
- Unpredictability: IPOs can be volatile. Not all companies perform well after listing.
- Overvaluation: Sometimes, companies are priced higher than they’re worth, which can lead to losses.
- Lack of History: For newer companies, there’s limited performance data to analyze.
While IPOs may seem exciting for newcomers, they demand careful analysis. Start small and focus on understanding the company’s fundamentals before investing.
Who is Eligible for IPO?
To invest in an IPO in India, you need to meet these basic requirements:
1. You must be at least 18 years old.
2. You need a valid PAN (Permanent Account Number).
3. You must have a demat account (to hold shares) linked to a bank account.
4. You should complete the KYC (Know Your Customer) process with your bank or brokerage.
Advantages of an IPO
Here are some reasons why people invest in IPOs:
- High Return Potential: IPOs often attract investors because of the chance to earn good profits if the stock lists at a premium.
- Diversification: IPOs allow you to add new companies to your investment portfolio.
- Discount for Retail Investors: Some companies offer shares at a discounted price for retail investors, making it more affordable.
- Ownership in Growing Companies: Investing in IPOs gives you a chance to be part of a company’s growth story from the beginning.
Disadvantages of an IPO
However, IPOs come with their share of risks:
- Market Risks: The stock price may fall below the offer price due to market conditions or poor company performance.
- Partial or No Allotment: In high-demand IPOs, you might not get the shares you applied for.
- Short-Term Volatility: IPOs are often very volatile in the short term, making them risky for beginners.
- Limited Information: Even with detailed disclosures, it’s hard to predict how a company will perform in the future.
How to Check IPO Allotment Status in NSE?
If you’ve applied for an IPO, checking your allotment status is straightforward:
- Visit the NSE website and go to the IPO allotment page.
- Enter details like your PAN, application number, or DP ID/client ID.
- Click on “Search” to see whether shares have been allotted to you.
This process is crucial for anyone who has invested in an IPO and wants to track their investment through NSE IPO Allotment status.
How to Check IPO Allotment Status in BSE?
To check your IPO allotment status on the BSE website:
- Go to the BSE IPO allotment page.
- Select the IPO name from the dropdown menu.
- Enter your PAN and application number.
- Click “Search” to view the allotment details.
Keeping track of your investments through BSE IPOAllotment status ensures you’re up to date with your holdings.
Terms of IPO
Before you invest, here are some common terms to know:
Issue Price: The price at which shares are sold during the IPO.
Listing Price: The price at which shares start trading on the stock exchange.
Oversubscription: When more investors apply for shares than are available.
Underwriting: The guarantee provided by underwriters to buy shares if not enough investors apply.
Lot Size: The minimum number of shares you can apply for in an IPO.
Frequently Asked Questions (FAQs)
1. How Much Profit is in IPO?
Profits depend on the listing price. For example, if the issue price is INR 100 and the listing price is INR 150, you make a profit of INR 50 per share. However, not all IPOs guarantee profits.
2. How Much Time Does IPO Allotment Take?
It usually takes 7-10 days after the IPO closes to finalize and announce the allotment.
3. Is IPO Money Refundable?
Yes, if you don’t receive shares, the application money is refunded to your bank account within a few days.
4. Is IPO Risk-Free?
No, IPOs are not risk-free. They can be volatile, and there’s always a chance of losses.
5. How to Check IPO Allotment Status by PAN Number?
You can check your allotment status using your PAN number on the registrar’s website (e.g., Link Intime or KFin Technologies) or stock exchange websites like NSE and BSE. Just enter your PAN and application details to view the status. This is another simple way to perform an IPO status check.
Read: Why Investors Are Turning to Banking and Financial Stocks Now
My View
IPOs can be an excellent way for beginners to enter the stock market, but they come with risks. Before investing, make sure to research the company, evaluate the market environment, and invest only what you can afford to lose. By staying informed and cautious, you can make the most of IPO investments and potentially achieve significant financial gains.
If you’re a beginner, start small, keep learning, and focus on long-term growth rather than quick profits. Investing in IPOs can be exciting—just remember to proceed with care!
