A guide to an Initial Public Offering (IPO)

An Initial Public Offering (IPO) is one of several ways for companies to raise capital. The funds raised in this manner will be used to fund the company's day-to-day operations. For instance, it might utilise the money to pay off existing debt or expand its firm.

Undoubtedly, "IPO" has been a buzzword in recent days. Numerous well-known businesses nationwide have decided to "go public," which has sparked much interest.

But what exactly is an initial public offering (IPO)? What does it mean for a company and you as an investor?

What is an Initial Public Offering (IPO)?

A private company first offers shares of stock to investors through a process known as an IPO or initial public offering. We often use the phrase "going public" to describe a company that goes public through an IPO.

An initial public offering (IPO) is a transaction in which a company raises funds and lists its shares on the stock exchange to provide investors ownership.

Companies that are just getting started or those that have been in business for decades might choose to go public through an IPO. The IPO process enables a firm to generate funds to support operations, accelerate expansion, and pay down debt. 

An IPO also allows corporations to repay their investors, who have the option of selling their private shares in the IPO. Generally, a private firm with significant development potential will explore going public, mostly for the above reasons. It's the obvious and expected next step for successful companies in many respects. Airbnb, which went public in the winter of 2020, is one of the more high-profile recent examples of a firm going public. 

Why Do Companies Decide to Go Through the Process of IPO?

• To raise funds for expansion and growth.

Every business requires money to expand operations, develop new goods, or settle a debt. A corporation can get this much-needed funding by going public, which is a terrific strategy.

• Allowing owners and early investors to make money by selling their stake

Initial investors and venture capitalists also view it as an exit plan. A corporation can become liquid by selling its shares in an IPO. At this point, venture capitalists sell their shares in the company to realise profits and leave the business.

• Increased public awareness

The stock market calendar has "star-marked" IPOs. These events are getting a lot of attention and buzz. This is an excellent technique for a business to advertise its goods and services to a new group of consumers.

Key terms related to IPO

• Issuer: The business that issues shares to raise money.

• Open / Close Date: Dates when investors can place bids on shares that the company is issuing.

• Allocation Date: This is the day that the public is informed of the allotment status on the website of the IPO registrar.

• Price band: The lower and maximum prices per share on which investors may bid are known as the price band.

• Under-subscription / Oversubscription: When a corporation receives fewer/more applications than the number of shares being offered to the public, this is known as under- or oversubscription.

How to Invest in an IPO

You must first register a Demat account and a trading account to invest in IPO shares. Most importantly, Demat accounts are necessary to purchase shares in an IPO. 

However, you will need to register a Demat account and a trading account if you intend to sell those IPO shares to a secondary market. 

A trading account serves as the interface for buying and selling shares on the stock market. In contrast, a Demat account electronically stores shares and securities (bonds, ETFs, mutual fund units, etc.).

Lastly, 

Invest in consistently successful businesses with long-term potential.

Selecting the ideal IPO is a difficult undertaking that requires thorough study and the capacity to forecast the company's performance over the long term. So to avoid losses you can take guidance from our experts at TradingBells.

Spend your money wisely! You worked hard to earn it.