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FAQs on investing in IPO

Srinivasa Sharan
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FAQs on investing in IPO

1) What is an initial public offering (IPO)? 

An initial public offering is a process by which a private company raises capital by issuing shares to the general public and lists its shares on the stock exchanges for trading. While there may be a large number of IPOs during a bullish market as there is a higher general demand for shares; not all IPOs may be worth subscribing to, as some of the companies may be in their earlier phase of growth and prone to more risks. All details of an IPO are available in the red herring prospectus that the company which is raising the capital must get confirmed by SEBI. 

2) What drives the price of an IPO upon its listing? 

As companies which are in the process of doing IPO are not as transparent with their financial details as already listed companies are, companies going in for an IPO typically underprice their shares while going the IPO route. This leads to the phenomenon of ‘listing gains’, which means that the share price tends to trade at a premium to its IPO price immediately upon listing. In a buoyant market such as the current one, listing gains from an IPO may be quite high in select IPO issues. For example in the last year, an IPO from Ashok Soota promoted Happiest Minds Technologies listed with a gain of 111 per cent from its offer price, while that of the gaming company, Nazara Technologies listed with a gain of over 80 per cent from its offer price. 

3) How does an investor choose an IPO for investing? 

An IPO may be an option for an investor if he is seeking a listing gain or a long-term gain. While a listing gain can be considered speculative, where investors may sometimes borrow & invest, investing with long-term gains in mind may be a better option for investors. When an investor invests in an IPO for short-term speculative reasons, any adverse sentiment in the stock market may affect the listing gains and could create losses for investors. However, better quality companies can be considered for investment as these would provide long-term sustainable returns for investors. 

4) What are the steps for an individual investor to invest in an IPO? 

Investors can apply for an IPO via a bank or a broker. The process of investing is done through the application supported by blocked amount (ASBA). This involves no specific movement of funds but a simple block for the investment amount against the balance in the bank account of the investor. An individual investor places a bid for the shares he would like to invest in. This is done as per the lot size/quantity as noted in the company’s prospectus. The investor can choose to bid for the price within the offering price range or at the cut-off price, which is the final determining price of the share issue. After placing a bid and approving the ASBA, an investor then receives a share allotment around 6 days after the IPO closes. This share allotment is then credited to the investor’s Demat account ahead of the shares being listed on the stock exchange. 

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