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What Is An IPO? How Can You Invest In One?

IPO is a process in which a private corporation offers its shares to the public in a new stock issuance. The company goes from being entirely private to offering ownership to the masses. The full form of IPO is Initial Public Offering. In simple words, it is the process of selling a portion of the company to the public shareholders. Any company can get listed in the exchange to go public regardless of its size, the type of business it deals in or how old it is. In 2011, Muthoot Finance shares were sold at a price ranging from INR 160 to 175 per share for its initial public offering to raise up to INR 9.01 billion.

How does it work?

IPOs come into the picture when a private company needs capital that cannot be generated through its regular operations.  By launching an IPO, the company takes a portion of its ownership shares to make them publicly accessible. Now, these stocks become the subject of market bidding and the company has no control over who invest in those shares.

To get started, the company needs to hire an underwriter (generally an investment bank) that can advise and fund the IPO. The main job of this bank is to approach institutions and investors to create initial interest in the IPO and to help with the disclosures and regulatory process. In India, the entire process of IPO is regulated by the Securities and Exchange Board (SEBI).

Purpose of an IPO

Basically, An IPO is a fundraising method that is used by companies to make a part of their shares publicly accessible. Once the IPO is launched, the company’s shares are traded on a stock exchange. The main reasons why a company decides to take the IPO route are:

  • To raise a large capital

  • To provide liquidity to company founders and early investors

  • To increase the overall profit

  • To get more publicity

How to invest in an IPO online?

In order to invest in an IPO, you have to open a Demat account and a trading account. With the help of a trading account, you can trade in the shares of your choice and a Demat account is required to hold all your purchased shares in an electronic format in one place. To sell your IPO shares to a secondary market also, you will need both a Demat account and a trading account. Here are the steps you need to follow to buy an IPO online:

  • Login to your trading account and select the IPO you want to invest in.

  • Now you need to enter the price you want to apply for shares and the lot size.

  • Fill out the application form and enter all the mandatory details.

  • Now you have to enter your bid price and the UPI ID.

  • Once the application is submitted, an approval request is sent on the UPI application, accept this request.

  • Once done, the amount for IPO is blocked.

Upon allotment, if no shares are allotted to you, the entire blocked amount gets unblocked. And in the case of part allotment, the required amount gets debited from your bank account and the remaining amount gets unblocked. If all the shares you requested for are allotted, then the entire amount gets debited from your account.

Key IPO Terms

Here are a few IPO-related terms that you should be aware of if you are planning to invest in an IPO.

  • Common stock: The units that represent individuals’ partial in a public company.

  • Issue price: The price at which a company decides to sell the shares of common stock before it begins trading on public exchanges. It is also commonly known as the offering price.

  • Lot size: It is the smallest number of shares an individual can bid for in an IPO.

  • Preliminary prospectus: A document created by the company to disclose information about its business, strategy, historical financial statements, recent financial results and management.

  • Underwriter: An investment bank that is hired by the IPO issuing company to manage the offerings. Other roles of an underwriter include determining the issue price, publicizing the IPO and assigning shares to investors.

  • Price band: The price range set for investor bidding on IPO shares. It is set by the company and the underwriter.

If you are planning to invest in an IPO but still do not have a clear idea of how to apply for an IPO online, you can take help from our finance experts. Visit your nearest Muthoot Finance branch to know more.

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