What is an IPO?
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors.
- Wikipedia
Generally, when we trade, the trade happens between two stockholders where one buys and the other sells. But how does the first stockholder get stocks? That is done by the process of an IPO. So, basically Initial Public Offering, also abbreviated as IPO is the way in which the company offers its shares to the public.
By doing an IPO, a company offers its stocks to the public and also discloses its finances as now they are of public interest. With an IPO, the company releases a (D)RHP — (Draft) Red Herring Prospectus. This prospectus includes the company’s financial standings, the allotted stocks, and information about what the company plans to do with these generated funds.
A company can go IPO for various reasons which are mentioned in the RHP. But generally, this is to raise equity by issuing shares to the public. This issue can be a fresh issue or Offer for Sale (OFS) from the existing investors or both. Sometimes it might happen that for IPO, the investor might want to sell their stocks completely and liquidate them. So, that can mean the investor has gained all that there is to gain from the company. So, I suggest to research before investing in an IPO.
Not all companies decide to go public, a company can decide to go public at an early stage or after a couple of decades even. However, for some government-regulated companies, there might be regulations that companies need to go public at a specific time. For example, for Small Finance Banks in India, they need to go IPO in around 3–5 years and make a fixed percentage of the bank as publicly owned.
Once the company releases these stocks to the public, they are available for trading in the open market. That means the company will be listed on the Stock Exchanges. However, not all shared for individual investors, they are released on a quota basis. That means the percentages of stocks are reserved for different categories of investors.
You should know that not all IPOs are of fresh listing. It is possible for a company to be already trading in the market and then creating a fresh issue of shares for public offering. Or even a sale of shares held by the angel investors or early investors which are generally in percentages of the company and are very huge.
So, in order to buy into an IPO, a subscription application needs to be made. That means we require a DEMAT account. Then we can check with the Broker for available/upcoming IPO issues and apply. The application of an IPO consists of a couple of key factors like the price per stock and the number of stocks per application amongst others. In the Groww brokerage platform, it is seen on the main screen itself. Generally, the price of a single application is around ₹15,000. Although we are allowed to make multiple applications and also increase the number of shares per application, we cannot invest more than ₹2,00,000 in an IPO.
IPO Applications are made up of sets of stocks. For example, here we can see that for the IPO of Burger King, the lot size is 250 shares. That means I can make applications in the multiple of 250 shares (250, 500, 750… etc). The number of shares per application change per IPO as we can see for a recently closed IPO of Gland Pharma, their lot size was just 10 shares, but their price range of a single stock was ₹1490–₹1500. That means, 10*1500 = ₹15,000 per application.
While applying, I always make sure to make the bids at cutoff pricing, which ensures I will get the best possible rate per share for my application.
Since the Burger King IPO is open, I will be applying for 1 lot of shares and I will be sharing the steps on how to apply just by using the UPI ID. So, if you want to know how to invest in an IPO, make sure to follow me here.
Edit: Here is the story of how to invest in an IPO. 👇
Unlike the open market, these shares will not be credited instantly after application, instead, it is a multi-day process. But they will be credited before they are listed in the market. That means, there are a couple of dates we need to consider while planning and applying:
- IPO Open — This is the date when the application process will start. Generally, the time range for application is 3 days from the Open date.
- IPO Close — This is the date on/before which the application needs to be completed. That means, the mandate needs to be authorized and the bid to be accepted.
- Allotment Finalization — This is the date when the shares will be allotted to each application. They can be checked online with the help of a PAN Number and application number.
- Refund Initiation — On this date, the refund of unallotted shares will be done.
- DEMAT Transfer — On this date, the shares will be transferred and will start reflecting in the broker’s portal.
- Company Listing — This is the date when the company’s shares start trading in the open market.
During the IPO open date range, applications can only be made between 10 AM to 5 PM.
So, companies set a number of stocks they want to release in the market. Sometimes it might happen that there are not many buyers for that stock, so then the company’s IPO will be undersubscribed and other times when there are more buyers, then the IPO will be oversubscribed. Although there are guidelines by SEBI that if an IPO is undersubscribed by a lot of percentage value, then that IPO will be canceled.
However, if an IPO is oversubscribed, then that means there are a lot more buyers than expected and not all will get allocations. Although according to the guidelines of SEBI, each retail investor should get at-least 1 lot of shares and the rest will be allotted by a draw. However, if the oversubscription is so high that even 1 lot cannot be allotted to 1 applicant, then these applicants are chosen by a lucky draw. The list of these applicants is ordered by their bidding rate, which means the applicants with a higher bid have a better chance of getting the shares allotted.
I generally invest in an IPO to hold the stocks for the long term, however, it is also possible to get the stocks and sell them just after the company is listed. It is profitable for traders if the GMP (Grey Market Premium) is high for that stock, this profit is also referred to as Listing Gains.
Also, it is worth noting that not all brokers are able to apply for an IPO, especially discount brokers, so it is useful to check for IPO availability before signing up for a DEMAT account at any broker.
So, that was a brief overview of what an IPO is. There is an open IPO of Burger King and I will be applying for that. I will soon be sharing a story about how to apply for an IPO. If you want to know how to apply for an IPO, then make sure to follow me as I am trying out different financial instruments and making various investments to reach my goal of becoming financially independent one day. Also, if you liked this story, then consider showing some love by applauding it below.
Edit: Here is the story of how to invest in an IPO. 👇
Also, if you want to open an account on the Groww platform. You can use my referral link (https://groww.app.link/refe/aayusharyan). Full disclosure, I will be getting some sort of reward for referring you to that platform.
