Part 1: What is IPO and Why Should You Consider Investing in It?
Part 1: What is IPO and Why Should You Consider Investing in It?
Introduction: Understanding IPOs in the Stock Market
If you have ever wondered how big companies raise money or how they get listed on the stock exchange, the answer is IPO (Initial Public Offering). For many investors, IPOs are an exciting opportunity to invest early in a company that has the potential to grow exponentially. But before you jump in, you need to understand what an IPO is, how it works, and whether it suits your financial goals.
This guide will explain what an IPO is, its types, benefits, risks, and whether investing in an IPO is the right decision for you.
What is an IPO?
An IPO (Initial Public Offering) is the process by which a privately owned company offers its shares to the public for the first time. In simpler words, it’s when a company decides to list itself on the stock exchange (like NSE or BSE in India, or NYSE and NASDAQ in the USA) to raise funds from retail and institutional investors.
For example, when Zomato launched its IPO in 2021, it became a public company, allowing investors to buy its shares and be part of its growth journey.
Why Do Companies Launch an IPO?
Companies go public through IPOs for various reasons:
Raising Capital for Expansion – Funds raised are used for business growth, debt repayment, or new projects.
Brand Recognition and Credibility – A listed company enjoys higher market trust.
Liquidity for Early Investors – Venture capitalists and early investors can sell their shares for profit.
Employee Stock Options (ESOPs) – IPOs allow employees to convert their stock options into actual shares.
Types of IPO
When learning what is IPO, it’s crucial to understand the two primary types:
1. Fixed Price IPO
The company fixes a price for each share, and investors decide whether to buy at that price.
Example: If the IPO price is ₹200, you apply at ₹200 per share.
2. Book Building IPO
The company offers a price range (say ₹100–₹120).
Investors bid within the range, and the final price is determined after evaluating demand.
Most modern IPOs use the book-building method because it helps the company find the right market-driven price.
How Does the IPO Process Work?
Understanding what is IPO also involves knowing the step-by-step process:
Filing DRHP (Draft Red Herring Prospectus) – The company submits details of its financials, business model, and IPO plans to SEBI (in India) or SEC (in the USA).
Approval and Marketing – After regulatory approval, the company markets its IPO through “roadshows” to attract investors.
Opening for Subscription – Retail and institutional investors apply for shares during a set subscription period (usually 3-5 days).
Allotment and Listing – Shares are allotted, and the company is listed on the stock exchange for public trading.
Who Can Invest in an IPO?
Anyone with:
A Demat Account
A Trading Account
And, in India, a UPI or ASBA-linked bank account
Retail investors, High Net-worth Individuals (HNIs), and Institutional investors can all participate, but retail investors get a reserved quota.
Benefits of Investing in an IPO
If you’re considering investing after learning what is IPO, here are the potential benefits:
✅ 1. Early Entry Opportunity
You get the chance to invest in a company before it becomes widely traded.
✅ 2. Listing Gains
Many IPOs list at a premium, giving quick profits on listing day.
✅ 3. Long-Term Wealth Creation
Strong companies like Infosys, TCS, and Reliance have rewarded early IPO investors with huge returns.
✅ 4. Transparency
Regulatory filings like DRHP provide detailed company information.
Risks of Investing in an IPO
While IPOs seem attractive, they are not risk-free:
⚠️ 1. Volatility
IPO prices can fluctuate heavily after listing.
⚠️ 2. Overvaluation Risk
Some companies price their shares too high based on hype rather than fundamentals.
⚠️ 3. Limited Historical Data
Unlike established companies, IPO firms often lack long-term performance records.
⚠️ 4. Lock-in Periods for Insiders
Early investors might sell shares after the lock-in period, causing price drops.
Famous IPO Success and Failure Stories
Successful IPOs
Infosys (1993): Early investors made massive returns as the IT boom took off.
Zomato (2021): Listed at a strong premium, rewarding short-term investors.
Failed IPOs
Paytm (2021): Listed below issue price, causing losses for early investors.
This shows that understanding fundamentals is crucial before investing.
Should You Invest in an IPO?
Investing in an IPO can be profitable, but only if:
✅ The company has strong financials and growth potential.
✅ You are ready for short-term volatility.
✅ You invest only after analyzing the DRHP and expert reviews.
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