How do IPOs work?

How do IPOs Work?

An Initial Public Offering (IPO) is the process through which a private company goes public by selling its shares to investors for the first time. It helps companies raise funds for growth while offering investment opportunities to the public.

Steps in an IPO Process

The journey of an IPO involves several stages to ensure compliance and successful execution:

• Company Decision: The company decides to go public to raise funds or gain market visibility.
• Underwriting: Investment banks are hired to guide the IPO process and manage investor relations.
• SEBI Approval: The company submits a draft red herring prospectus (DRHP) to SEBI for review and approval.
• Price Setting: A price range or fixed price is decided based on market demand.
• Public Subscription: Investors apply for shares during the subscription period.
• Stock Exchange Listing: After allotment, the shares are listed for trading on stock exchanges like NSE or BSE.

Types of IPO Pricing

IPOs can be categorized based on their pricing model:

• Fixed Price Issue: The price of shares is fixed and disclosed in advance.
• Book Building Issue: Investors bid within a specified price range, and the final price is determined based on demand.

Benefits of Participating in IPOs

Investing in IPOs offers multiple advantages:

• Potential for high returns if the stock price rises after listing.
• Opportunity to invest in emerging companies at the ground level.
• Chance to diversify your investment portfolio.

Conclusion

Understanding the IPO process helps investors make informed decisions and leverage the potential growth of emerging companies. Participate in IPOs smartly to grow your financial portfolio.