An IPO (or Initial Public Offering) is when a private company decides to sell its shares to the public for the first time. After this, the company becomes “public” and its shares are traded on the stock market.
In simple words, it’s like opening the doors of the company to outside investors who can now own a part of it.
Why Do Companies Go for an IPO?
The main reason is to raise money. Companies often need extra funds to grow, and going public helps them get that money without taking a loan.
Some common reasons why a company might go public:
- To expand into new markets
- To build new factories or offices
- To invest in technology or product development
- To reduce or pay off debt
- To boost the brand’s reputation and trust
📌 Example:
Imagine a startup that’s grown fast but now wants to open offices in 10 more cities. Instead of borrowing money from banks, it may choose to raise funds by selling shares to the public.
Key Terms You Should Know
Here are a few common words related to IPOs, explained in simple terms:
- Issuer: The company that’s selling its shares.
- Underwriter: Usually a bank or financial company that helps plan and manage the IPO.
- Prospectus: A document that shares all details about the company—its business, finances, and risks.
- Issue Price: The price at which the company sells its shares during the IPO.
- Lot Size: The smallest number of shares you can apply for in the IPO.
How Does the IPO Process Work?
Going public is a big decision, and it involves several steps:
- Appointing an Underwriter
The company ties up with one or more banks to handle the IPO. - Preparing the Prospectus
Together, they prepare a draft that talks about what the company does, its future plans, and financial details. - Getting Approval
This draft is sent to the market regulator (like SEBI in India). They check if everything is in order. - Marketing the IPO
The company then promotes the IPO through events, ads, and meetings to attract investors. These are called roadshows. - Setting the Price Band
A price range is set (like ₹300 to ₹320 per share). Investors can bid within this range. This step is called book building. - Receiving Bids and Allotment
Investors apply for shares. If more people apply than the number of shares available, shares are distributed through a lottery or proportionally. - Listing on the Stock Exchange
Once shares are allotted, they get listed on the stock exchange (like NSE or BSE), and regular trading begins.
Who Can Invest in an IPO?
IPOs are open to different types of investors, and each group gets a specific portion of the shares:
- Retail Investors: Regular individuals investing up to ₹2 lakh.
- High Net-Worth Individuals (HNIs): People investing more than ₹2 lakh.
- Institutional Investors: Big players like mutual funds, insurance companies, and pension funds.
- Anchor Investors: Large investors who commit before the IPO opens to the public. Their participation builds trust.
What Are the Pros and Cons of Investing in an IPO?
Advantages:
- You get to invest in a company early, sometimes at a good price.
- Some IPOs give strong listing gains on the first day of trading.
- Long-term IPOs can turn into solid investments if the company performs well.
Risks:
- New companies may not have a long financial track record.
- Sometimes, IPOs are priced too high and fall after listing.
- If the issue is oversubscribed, you may get fewer shares than you applied for.
📌 Example:
Zomato’s IPO was a hit and gave good returns initially. But Paytm’s IPO didn’t do well and its stock price dropped soon after listing. This shows that not all IPOs are safe bets.
How to Apply for an IPO?
Applying for an IPO is easier than ever:
- You can use your bank’s net banking portal.
- Or you can apply through stock trading apps like Zerodha, Groww, or Upstox.
- You’ll need a Demat account, and the money will stay blocked in your bank account till the shares are allotted (this is called ASBA—Application Supported by Blocked Amount).
What Happens After a Company Goes Public?
Once a company is listed on the stock exchange, it has new responsibilities:
- It must share quarterly results and updates with the public.
- It has to follow rules and regulations set by SEBI.
- The management is now answerable to public shareholders.
Basically, a public company must be more transparent and careful about how it runs.
Final Thoughts
An IPO is a major event—for both the company and the investors. For companies, it’s a chance to grow with public support. For investors, it’s an opportunity to be part of a new business journey.
But like any investment, it’s important to do your homework. Read the company’s prospectus, understand its business model, and avoid jumping in just because of the hype. A thoughtful decision always goes a long way in investing.
