Investing in Initial Public Offerings (IPOs) has traditionally been an appealing investment option among investors. Earlier, participating in an IPO required filling out lengthy forms and waiting in long bank queues to apply.
Nowadays, investing in an IPO has become effortless. You can apply directly through your internet trading account or via internet banking using a demat app.
You can now conveniently invest in IPOs from the comfort of your home. In this blog, we will discuss the basics of IPOs that every beginner should know and the process of investing in IPOs.
What is an IPO?
IPO, short for Initial Public Offering, refers to the process where a private company becomes public by offering its shares to the general public for the first time.
The company offering its shares to the public is called the “issuer,” and it does so with the assistance of investment banks. After the IPO, the company’s shares are traded in the open market.
The primary objective of a private company going public is to raise capital. The company can gather funds to expand its business by selling shares in the open market.
Types of IPOs
If you think all IPOs are the same, think again. In India, IPOs can broadly be classified into four categories:
Fresh Issue of Shares
This involves issuing new shares to the public. Funds raised go to the company, and equity is diluted.
Offer for Sale (OFS)
Here, existing investors sell their shares to the public. The company doesn’t receive fresh funds, and there’s no equity dilution.
Combined offer
This involves a mix of fresh issues and OFS. Many large IPOs fall under this category.
Follow-on Public Offer (FPO)
Under this, an existing listed company issues additional shares to its investors.
An IPO increases the number of shareholders and brings stricter compliance requirements for companies listed on stock exchanges.
Process to Invest in an IPO: A Guide for Beginners
Here’s a simple step-by-step guide to help you invest in an IPO with confidence:
Step 1: Learn What an IPO Is
Through an IPO, a company offers its shares to the public for the first time. There are two ways companies price their IPOs:
- Fixed Price Offering: The company sets a fixed price for the shares.
- Book-Built Offering: The price depends on the bids investors place.
Understanding these basics will help you know how IPOs work and what to expect when investing.
Step 2: Pick the Right IPO
Be selective and thoughtful while investing in an IPO. You can consider these factors:
- Personal Factors: Decide how much you can invest and the level of risk you can handle. Check if investing in an IPO fits your long-term financial plans.
- Company Factors: Research the company’s planning for an IPO. Read its prospectus carefully. Examine its financial history and growth plans. This will help you assess its potential.
Step 3: Get Your Funds Ready
Make sure you have enough money to invest. While investing in an IPO, you must secure funds responsibly. If the company performs poorly, you could lose your investment. Only invest what you can afford to lose.
Step 4: Open a Demat and Trading Account
To invest in an IPO, you need two accounts:
- A Demat account stores your shares in electronic format.
- A trading account enables you to buy and sell shares.
Invest in IPOs seamlessly with the HDFC Sky App, which allows you to open demat account and trading accounts easily. This app also allows you to manage all your investments in one place.
Step 5: Apply for the IPO
There are two ways to apply:
- Online: Log in to your trading account and apply with a few clicks.
- Offline: Fill out a physical application form and submit it to your bank or broker.
The online method is faster and more convenient. Your details are automatically entered from your Demat account, saving you time and effort.
Step 6: Use ASBA for Payment
When you apply for an IPO, you can use Application Supported by Blocked Amount (ASBA). This feature blocks the required funds from your account until shares are allocated.
- The blocked amount is adjusted only for the shares you receive.
- If fewer shares are allotted than you applied for, the remaining money stays in your account.
ASBA removes the need for cheques or demand drafts, making the payment process seamless.
Step 7: Place Your Bid
You need to place a bid for the IPO.
- Bids must match the company’s price range, known as the price band.
- You must also bid for at least the minimum lot size, the smallest number of shares you can buy.
Please check the prospectus for details on price and lot size. If necessary, you can adjust your bid before the IPO closes.
Step 8: Wait for the Allotment
After the IPO application process is completed, the company will allocate shares. If you are allotted the shares you applied for, you’ll receive a Confirmatory Allotment Note (CAN) within six working days. The shares will then be transferred to your Demat account.
Step 9: Start Trading
Once the shares are in your account and the company is listed on the stock exchange, you can start online trading.
- If you believe the company has growth potential, you can hold the shares for long-term gains.
- You can also sell the shares for short-term profits.
Ultimately, the choice entirely depends on your investment objective.
Essential Guidelines for Investing in IPOs for Beginners
Understand Your Purpose Before Investing
It’s essential to have a clear purpose before investing in an IPO. If you closely monitor a company’s progress or understand its sector, you can consider investing in an IPO.
The fundamental rule when investing in an IPO is to avoid borrowing funds. IPO investments come with risk; if the IPO lists at a discount, you risk losing the borrowed money.
Additionally, borrowing comes with interest rates you’ll need to pay, adding to the risk. Make a thoughtful decision and ensure you know why you want to invest in an IPO.
Big Names Don’t Always Mean Big Gains
Many beginners fall for the allure of big names and invest in IPOs backed by reputed stakeholders or investment banks. But those big names on the list should not be your sole reason to invest in the IPO.
Instead of relying solely on big names, you can review the company’s financials and growth prospects outlined in the prospectus. Focus on its potential rather than just the names associated with it.
IPO Performance and Market Trends Go Hand in Hand
Several significant factors influence market trends and encompass stocks with varying characteristics. These factors may follow the market’s overall movement but may not directly dictate it.
A financially sound and fundamentally strong company may perform well during favourable market conditions. Do your research well and invest based on your investment goals and risk appetite.
Conclusion
Investing in IPOs can initially seem tricky, but following the steps mentioned above can streamline the overall process. Tools like the HDFC SKY App make the process easy. Before you start, stay informed about important dates, such as NSE Holidays 2025, to plan your investments effectively. These holidays can impact trading schedules, so knowing them ensures you never miss an opportunity.
Apply for IPOs in one click with HDFC SKY
