Before discussing about various details of an IPO, it is important we cover some basics. These basics are prominent for learning about IPO.
All of us must've come around words like 'stocks', 'shares,' and 'stock market'. Now, it's quite easy for a person with a finance background to understand the meaning of these terms.
However, for us newbies, these are just some fancy words. So, it's important to discuss what these terms are for understanding IPO.
As an analogy, consider a scenario in which a group of people is celebrating someone's birthday. Each of them is going to receive a slice of the cake.
In this analogy, the slice refers to the 'share' of a company, and the people receiving the slices are 'stakeholders'. The cake itself is the entire company, and the person whose birthday is celebrated can be thought of as head of the company.
Thus, when we buy shares, it means we own some part of a company. As for 'stock,' it's a term used to define the multiple shares of different companies. The stock market is the place where these buyers and sellers of stocks aggregate.
We are now ready to head on to our actual topic.
What is an IPO?
IPO is an abbreviation for Initial Public Offering. An IPO is the first sale of the stock, which is issued by a company.
When a company announces an IPO or an Initial Public Offering, it means that the company is allowing the general public to buy its shares. Hence, the company is said to 'go public' by announcing an IPO. Before an IPO, we can refer to a company as 'private'.
But why do companies do it? Shouldn't they lose some of their parts (or shares) by making an IPO?
Well, an IPO does result in loss of shares, but the public buys those shares. An IPO, thus, helps a company to raise funds, which in turn is essential for its growth.
Furthermore, IPO helps the individual owners of a company to become very rich by selling their shares.
Okay, so you might be thinking – "What's in it for us? Why do we buy these shares?"
Well, you could generate a huge profit by selling a company's shares. All you need to do is to buy those shares at lower prices. However, there's no guarantee that the value of IPO shares will always increase. (So, don't expect to become "Million Dollar Man" all of sudden!)
Applying for an IPO
Now that you know about IPO, let's discuss how to apply for one:
- Securities and Exchange Board of India (SEBI) has all the information about a company's business plan on their prospectus. Go through it, and decide which shares you want to buy.
- Create your trading-cum-Demat account, which acts as a repository for all the stocks you purchase.
- An IPO application can be filled through your trading account or bank account.
- ASBA or Application Supported by Blocked Amount facility is very important to get for applying in an IPO. ASBA application is available in both physical and Demat format.
With your IPO application completed, you can now bid for a company's share in the stock market.
Sometimes, the demand for shares of a company is exceedingly high, due to which there's a chance you'll receive fewer or no share. So, the banks will unlock your bid money, which you can use again.
Tips to make good money through an IPO
- Carefully study the performance of the company before investing in its shares. Never trust anyone before researching the company yourself.
- Seek a company with something new and exquisite to offer, as they have a good chance of generating more profit.
- Try to invest in shares of a company with foreign collaborators. Foreign collaborators are quite good at predicting the performance of the company and its prospects.
Finally, study the basics of the stock market in detail if you're new to it. Learn how to invest and bid properly.
IPOs are great ways to make money, but only if you're clever enough. So, keep improving yourself.