What is IPO in Stock Market: Complete Guide for Beginners

An Initial Public Offering (IPO) is when a private firm sells its shares to the public for the first time, moving from private ownership to public ownership and putting its shares on a stock exchange. This event is a big deal for any company since it lets them raise a lot of money, gives existing shareholders cash, and gives a lot of investors, both retail and institutional, the chance to invest. ​

What does an IPO mean?

A private corporation sells shares to the public for the first time in an IPO, or Initial Public Offering. Before an IPO, only the founders, early employees, private investors, and venture capitalists own the company. When a corporation goes public, it sells shares to the broader public so that anyone can own a part of the business. People often call this change from private to public “going public.” 

Why Do Businesses Go Public?

There are a few main reasons why companies go public:

1) Getting money: The main reason for an IPO is to get a lot of money. The money obtained might be used to pay off debts, help with growth, fund research and development, or support other important projects. ​

2) Shareholders can get cash from IPOs: IPOs give current shareholders (including founders, employees, and early investors) a way to make money from their shares. They can sell their shares on the open market after the IPO, but only if they are not locked up. ​

3) More Visibility and Prestige: Being on a stock exchange can make a company more well-known, trustworthy, and appealing to new consumers, partners, and employees. ​

4) Facilitating Acquisitions: Companies can use publicly listed shares as money to buy other companies, which makes it easier for them to grow through smart purchases. ​

The Process of an IPO

The process of going public is complicated and includes many procedures, rules, and the involvement of many groups of people. Here’s a short summary:

1) Getting Ready and Due Diligence

The corporation hires investment banks (underwriters) to aid with the IPO. These banks do their homework, check the company’s finances, and assist set the price of the offering. The company also needs to make a prospectus, which is a long document that tells people about the business, its finances, the dangers, and the terms of the offering. ​

2) Filing with the authorities in charge

The corporation sends the right registration papers to the right securities regulator, like the SEC in the US or SEBI in India. These papers, which include the prospectus, are open to the public for perusal. ​

3) Roadshow and reaching out to investors

The underwriters and company leaders go on a roadshow to get institutional investors interested in the IPO. This includes presentations, meetings, and question-and-answer sessions to get people interested and see how many people want the shares. ​

4) Setting Prices and Allocating

The firm and underwriters decided the ultimate offering price based on what investors said. Then, shares are given out to investors, with institutional investors and high-net-worth individuals (HNIs) frequently getting first dibs. ​

5) Listing and Trading

On the day of the IPO, the shares are put on a stock exchange and people can start buying and selling them. The price of the stock can change dependent on how many people want it, how investors feel about it, and the state of the economy as a whole. ​

Different kinds of IPOs

There are two primary kinds of IPOs:

• Fixed Price IPO: Before the offering, the company and the underwriters agree on a defined price for the shares. Investors know the price ahead of time, but they don’t know how much demand there is until the issue closes. ​
• Book Building IPO: The price is set by a bidding process. Investors place bids within a certain price range, and the final price is depending on how many offers were received. ​

Important Terms for IPOs

Investors and other interested parties need to know crucial IPO terms:

• Shares are pieces of a firm that you own. When you acquire shares in an IPO, you own a part of the business. ​
• Underwriters are banks and other financial organizations who assist businesses go public by handling the IPO process, setting the share price, and making sure the rules are followed. ​
• Market capitalization is the entire worth of a company’s outstanding shares. It is found by multiplying the number of shares by the share price. ​
• Lock-up Period: A time (usually 90 to 180 days) after the IPO when current shareholders can’t sell their shares. ​
• Prospectus: A legal paper that gives a lot of information about the firm, its finances, the dangers, and the terms of the IPO. ​

Pros and Cons of Putting Money into IPOs

Benefits:

1. Investing in an IPO gives investors the chance to buy shares at the original price, which could lead to future growth. ​
2. Diversification: IPOs give investors a chance to diversify their portfolios by putting money into new and growing businesses. ​
3. Potential for High Returns: If the firm does well after going public, an IPO can give you a lot of money. ​

Risks:

1. IPO equities can be very volatile, with prices changing a lot in the first few days of trading. ​
2. Uncertainty: The success of an IPO depends on a number of things, such as the state of the market, the company’s fundamentals, and how investors feel about it.
3. Not enough historical data: New companies may not have a lot of financial history, which makes it hard to judge their long-term prospects. ​

Initial Public Offerings (IPOs) in India

The Securities and Exchange Board of India (SEBI) is in charge of IPOs in India. There are strict rules about what information must be made public, protections for investors, and oversight by regulators. numerous retail investors are now interested in Indian IPOs, and there have been numerous successful listings in the past few years. ​

Conclusion

An IPO is a big deal for a company because it lets people buy shares of the firm and opens up new ways for it to develop and get money. Investors, business owners, and anybody else who is interested in the stock market should know how the IPO process works, what its pros and cons are, and what the most important terms are. You may assist readers understand the complicated world of IPOs and make smart choices by giving them in-depth, SEO-friendly material.

Nadim

Mr. Nadim Abbas M G is an Intermediate Chartered Accountant with a strong background in Information Technology. He combines his expertise in IT with a deep understanding of the stock market, making him a valuable resource for both financial and technical insights. With hands-on experience in accounting, IT systems, and stock market analysis, Nadim excels in bridging the gap between finance and technology, offering strategic advice and expert guidance in both domains.