Introduction

An Initial Public Offering (IPO) is the first time a company sells its shares to the general public. It marks the company’s entry into the stock market. Before an IPO, a company’s ownership is private — only founders, family, or early investors hold shares. But after an IPO, anyone can buy or sell the company’s shares through the stock exchange.

For new investors, understanding what is IPO is the first step towards building wealth through stock markets. In this detailed guide, you’ll learn what an IPO is, why companies launch an IPO, how the IPO process works, the benefits and risks, and how you can participate as an investor.

Why Companies Launch an IPO

Companies launch IPOs mainly to raise money for growth. When a company becomes public, it can access a large pool of funds to expand its business, pay off debts, or invest in new projects.

Key reasons companies go for an IPO:

• Raise Capital: To build new factories, launch new products, or enter new markets.
• Brand Visibility: Listing improves the company’s image and trust.
• Liquidity: Early investors or founders can sell some of their shares.
• Stock Options: Companies can offer stock options to attract and keep talent.

How the IPO Process Works

The IPO process involves multiple steps and approvals from regulators like SEBI (Securities and Exchange Board of India). Let’s break it down:

Steps in an IPO:

1. Hire Merchant Bankers: The company hires investment bankers to manage the IPO.
2. Prepare Draft Red Herring Prospectus (DRHP): This document has all company details, financials, and risks.
3. Get SEBI Approval: SEBI checks if everything is clear and fair for investors.
4. Fix IPO Price Band: The company and bankers decide the price range.
5. Open Subscription: Investors can apply for shares during this period.
6. Allotment: Shares are allotted based on demand.
7. Listing: Finally, shares are listed on the stock exchange.

Types of IPO

In India, there are mainly two types of IPO: Fixed Price Issue and Book Building Issue.

Benefits of Investing in IPOs

Investors look forward to IPOs because they can offer good returns if the company performs well. Here are some benefits:

• Chance to invest early in growing companies.
• Possibility of listing gains if the share price rises on listing day.
• Portfolio diversification.

Risks Involved in IPO Investment

While IPOs can be rewarding, they are not risk-free. New investors should always read the prospectus carefully.

• Companies may be new with unproven track records.
• Share price can fall below IPO price after listing.
• Oversubscription means not everyone gets shares.