A Beginner’s Guide to Understanding IPO

Thousands of companies trade on the NYSE, or New York Stock Exchange, and the Nasdaq. These companies range from multinationals to smaller, more trivial companies, with market capitalizations of less than a motor car’s price.

Each of those companies had to start somewhere. They opted for trading with IPOs, turning from private companies to public sector undertakings, attracting investors, and escalating capital.

What Is an IPO?

An investor can buy shares of a company through either a primary or a secondary market. The primary market permits an investor to purchase shares of a company-issued for the first time through IPO or the Initial Public Offering.

Any company that needs funds or capital for its growth and expansion would choose the path of IPO. When you buy shares of the company as an investor, you become a shareholder. The price of the shares you possess increases and collapses due to various factors that affect the company. 

In short, Initial Public Offering is a form of equity financing, where the institutions of the company give a small part of the ownership of the company in exchange for capital. It is the counterpart of debt financing.

The Basics of IPO

Let us have a glance at the key terms in IPO:

1. Offer Document:

This document provides all primary information like the company’s promoters, the financial condition, objectives of an initial public offering, etc.

2. Red Herring Prospectus:

This preliminary document is used to refer to a proposal document in case of a book built issue. All details – except the price and number of shares – are given in this document.

3. Letter Of Offer:

An offer certificate of a rights issue of shares is called the letter of offer.

4. Fixed Price Issue:

Here, the issuer decides the issue price, mentioning the same in the offer document.

5. Book-Built Issue:

It is an economical way based on demand from the investors and method of making a public issue.

6. Price Band:

The price range in which the investors can bid in an IPO is termed a price band. The difference between the floor price or the minimum price at which the investor can bid and the cap price or the maximum price at which an investor can bid should not be up to 20%.

7. Cut-off Price:

The rate at which the company will offer shares to investors is termed the cut-off price.

What Are An IPO Investment And IPO Shares?

It is an investment by which even regular investors get to invest in a business. You may have various life goals such as buying a home, a car, higher education for children, children’s education, etc. To fulfill all these, you should have proper financial planning. It simply means that you have to invest your wealth in some financial assets which assure you higher returns.

How An IPO Functions?

Before an IPO, a business is privately owned, usually by its originators and sometimes the family members who lent them capital to get up and start functioning. 

The founders give the shareholders and employees a share in place of cash. Because they know that giving away a part of the company won’t cost them anything if the business flounders. If the operations succeed and the company eventually goes public, everyone should win. A stock that was worth zero the day before the IPO will now have a specific value.

Furthermore, because their shares don’t trade on an open market, private owners’ stakes are hard to evaluate in the company. A privately held firm’s value is quite a guess, dependent on its profits, assets, income, growth, etc. 

The IPO process works with an individual firm reaching out to an investment bank to facilitate the IPO. The company’s investment bank values come up with a share price, valuation, a date for the IPO, and other vital information through financial analysis.

A business that wants to obtain an IPO must register with the exchanges and the SEC or the Securities and Exchange Commission to ensure it fits all criteria. On completion of all the required processes, it will list a company on a stock exchange. Then its shares will be available for buying and selling. This is one of the common ways a business raises capital to fund its growth.

IPO At A Gist

• IPO is when a private business becomes a public undertaking by selling its shares on a stock exchange.
• Private firms work with investment banks to bring their shares to the people, which requires large amounts of attention, marketing, and administrative requirements.
• Procuring shares in an IPO is not that easy as the first offering is generally reserved for large investors.
• Regular investors can quickly purchase shares of a newly IPO-ed company after the IPO compared to the newcomers.

When stocks go public, the company insiders who own shares in the first place are – according to the law – prohibited from selling it for a fixed period as stated in the SEC regulations, for at least three months. Until then, the insiders are wealthy only in writing.

The moment they can sell the shares, which they usually do, they do it all at once. This lowers the stock price. At that point – with an overabundance of shares entering the market – regular investors often get their first hand at what is now an IPO well along in its infancy.

An IPO is one of the investment goods that you can use for long-term investment. It is a process by which both the company and investors are benefitted. The company obtains the required capital when the investors buy shares, and in turn, the investor can use it for fulfilling his or her life goals. Liquidity is high in shares as you can sell it as per your need of money on the exchange with the broker’s help. So what are you waiting for? Get started with your Demat account now and invest in the best upcoming IPOs.