Understanding IPO: The Basics of Initial Public Offering

An Initial Public Offering (IPO) is a significant event in the life of a company. It marks the transition from being a private entity to becoming a publicly-traded company. But have you ever wondered how the concept of IPOs came into existence? Let’s delve into the fascinating history of IPOs.

What is an IPO?

An Initial Public Offering (IPO) is the process by which a private company becomes publicly traded on a stock exchange. It involves the sale of new or existing securities by the company to the public. The company that offers its shares, known as an ‘issuer’, does so with the help of investment banks. Once the company’s shares are listed on a public exchange, anyone, including individuals and institutions, can buy them.

How IPO works?

An Initial Public Offering (IPO) is a process that marks the transition of a private company into a publicly-traded entity. The process begins with the company deciding to go public, often with the goal of raising capital. The company then partners with an investment bank, which acts as an underwriter. The underwriter conducts due diligence, prepares the necessary regulatory filings, and helps determine the price at which the shares should be issued. Once the regulatory authorities approve the IPO, the company’s shares are listed on a stock exchange and the general public can buy them. The funds raised from the IPO can be used by the company for various purposes such as business expansion, debt repayment, or research and development. It’s important to note that investing in an IPO involves risk, and potential investors should conduct thorough research before deciding to invest.

Why is an IPO required?

The primary purpose of an IPO is to raise capital for the company. This capital can be used for various purposes such as funding research and development, paying off debt, or expanding business operations. Going public also increases a company’s visibility and credibility in the market, which can attract new customers and partnerships.

History of IPOs

The roots of IPOs can be traced back to the Roman Republic, where shares in businesses were sold to the public. However, the first recorded IPO in history was by the Dutch East India Company in 1602. The company issued shares to the general public to raise capital for expanding its business ventures. This marked the birth of the modern-day stock exchange.

Underwriting Process

Underwriters play the most important role in successfully completing the IPO process. These are selected by the company. Which are publicly informed through advertisement. The company may select one or more underwriters. This is done when the company wants to launch a very large IPO which a single underwriter is not able to handle.

The underwriting process involves investment banks buying shares from the company and then selling them to the public. The underwriters assume the risk of the IPO and are responsible for ensuring that the shares are sold to the public. They do this by conducting due diligence, preparing regulatory filings, and marketing the offering to investors.

Fixed Price Issue vs Book Building Issue

In a Fixed Price Issue, the company determines a fixed price at which its shares are offered to investors. The investors know the share price before the company goes public. 

In a Book Building Issue, a price range is provided by the company (with the help of underwriting firms), and investors bid for shares within this range. The final issue price is determined after considering all the bids.

Issue Price and Issue Size

The Issue Price is the price at which a company’s shares are offered during an IPO. This price is crucial as it is the cost that investors will have to pay to purchase the IPO.

The Issue Size refers to the total value of shares that a company plans to sell during an IPO. It is calculated by multiplying the number of shares by the issue price. The issue size can give investors a sense of the scale of the IPO.

 Steps involved in Initial Public Offering (IPO) Process

here are the steps involved in the process of an Initial Public Offering (IPO):

  1. Planning Stage: The company planning for an IPO collaborates with an investment bank to handle the IPO. They agree on the deal, which includes details about the financial structure, number of shares to be issued, type of securities, etc.
  2. Due Diligence & Regulatory Filing: The investment bank conducts a thorough review of the company (due diligence). Post this, a registration statement is filed with the Securities and Exchange Board (SEBI in India or SEC in the USA) for approval. This document contains details about the company’s business, financial condition, and the intended use of capital proceeds.
  3. Pricing: The company and the investment bank agree on the price band of the shares and the number of shares to be issued. This is done based on the company’s valuation.
  4. Roadshow: The underwriters and company management conduct a series of presentations (roadshows) to potential investors, showcasing the merits of the investment and answering queries.
  5. Book Building & Pricing: Based on the investor feedback and current market conditions, the final price of the shares is determined.
  6. Subscription: Once the regulatory body approves the IPO, the subscription period begins. During this period, investors can bid for the company’s shares.
  7. Allotment: After the subscription period ends, shares are allotted to the investors. This could be based on a lottery system if the issue is oversubscribed.
  8. Listing: Finally, the shares begin trading on the stock exchange. This marks the transition of the company from private to public.

How to track IPO Stocks?

Tracking IPO stocks is an essential part of investing in new public companies. After a company goes public, its stock price can be quite volatile due to the market trying to find the right price for the stock. Investors can track IPO stocks through financial news websites, stock market apps, and brokerage platforms. These platforms provide real-time data on stock prices, trading volume, and other relevant information. Additionally, investors should also keep an eye on the company’s financial reports and news about its operations, as these can significantly impact the stock’s performance. Remember, investing in IPOs involves risk, and it’s important to do thorough research and consider your individual financial situation and investment goals before making an investment decision. Happy investing!

Things you must know before Investing in IPO

lock-up period

Before investing in IPO, it is important for you to know that if you get entry in the IPO of any company, then you cannot withdraw money for some time even after the company is listed. Which is called lock-up period. Generally, this ranges from 90 to 180 days. In such a situation, even if the share price falls, you cannot exit before the lock-up period.

Remember, investing in an IPO should be based on your individual financial goals, risk tolerance, and investment strategy. Always do your homework before making an investment decision. Happy investing!

FAQ

Frequently Asked Questions about IPOs

1. What is an IPO?

An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time and becomes a publicly traded company.

2. Why do companies go public?

Companies go public to raise capital for various purposes such as funding research and development, paying off debt, or expanding business operations. Going public also increases a company’s visibility and credibility in the market.

3. What is a lock-up period?

A lock-up period is a predetermined timeframe following an IPO, during which major shareholders are prohibited from selling their shares. This helps stabilize the stock’s price during its early days on the market.

4. What is the role of an underwriter in an IPO?

An underwriter is an investment bank that handles the IPO process. They conduct due diligence, prepare regulatory filings, market the offering to investors, and assume the risk of selling the shares to the public.

5. What is book building in an IPO?

Book building is a process by which an underwriter determines the price at which securities will be offered. Potential investors are asked to provide the number of shares they would like to purchase and the price they are willing to pay.

6. What is the difference between a fixed price issue and a book building issue?

In a fixed price issue, the company determines a fixed price at which its shares are offered to investors. In a book building issue, a price range is provided, and investors bid for shares within this range. The final issue price is determined after considering all the bids.

7. What are the risks of investing in an IPO?

Investing in an IPO, like any other investment, involves risk. The company’s shares may not perform as expected, and investors could lose a portion or all of their investment. Therefore, it’s important to conduct thorough research before investing in an IPO.

8. What happens after the IPO?

After the IPO, the company’s shares are listed on a stock exchange and can be bought and sold by the public. The company also has new responsibilities, such as disclosing financial information regularly to comply with the rules of the stock exchange.

Remember, investing in an IPO involves risk, just like any other type of investment. It’s important to conduct thorough research and consider various factors before investing in an IPO. Happy investing!

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