IPOs have forever intrigued investors with their tempting mix of potential profits and the excitement of backing fresh-faced companies. These public debuts not only offer a chance to ride the wave of initial growth and market buzz.
However, diving into IPOs requires more than just enthusiasm. Only if you are well-informed and updated, investing in initial public offerings can yield good returns. As a beginner, you cannot separate the benefits from the risks. It goes hand-in-hand. Hence, before considering an IPO investment, it is important to get a hold of the basics. Let’s take a look!
What Is An IPO?
When private firms offer their shares to the public to raise equity money from public investors, this is known as an Initial Public Offering (IPO).
A privately held business becomes a public company through this initial public offering (IPO) process. As a result, smart investors now have the chance to reap a substantial return on their capital. Generally, an IPO is seen as a significant step to help the company expand, raise its market valuation, and raise a large amount of money to make the necessary changes in the firm.
How Does An Initial Public Offering Work?
A firm can generate funds through an IPO by issuing shares to the market. As an investor, you can earn a stake in the company by purchasing these shares. Below is a detailed step-by-step process for issuing an IPO.
Preparing
It is important that the company’s financials, business strategies, and regulatory filings are prepared in advance, i.e., before the IPO process. These companies generally work with legal teams, investment banks, and auditors to help them prepare the necessary documents.
Next, a prospectus is outlined, and the company drafts all the details on its business’s activities, financial situation, and potential risks.
Choosing An Underwriter
The firm then selects an investment bank to act as an underwriter and contribute to determining the IPO pricing process. The investment bank purchases the company’s IPO shares to sell them to you (the investor).
Regulatory Approval
Next, the Securities and Exchange Board of India (SEBI) and other applicable regulatory bodies are notified of the company’s IPO when it files its registration statement. The authority will then review the papers to ensure that they comply with all the applicable securities measures and laws and to ensure investor protection.
Marketing
The firm and its underwriters go on a roadshow to promote the IPO to reach enough institutional investors. During the roadshow, the management displays the company’s financials and growth prospects to pique the interest of possible investors and ensure their IPO investment.
Asking The Price
The offering price is determined by the company’s valuation, current market conditions, and the relevant demand from investors. Striking a balance is important here. Companies try to maintain a balance between offering investors a good deal for their IPO investment and helping the company raise capital.
Allocating The Shares
Here, the distribution of shares takes place as per the demands and orders of the interested parties, including retail investors, institutional investors, and others. In addition, the company insiders get leverage because certain shares may be reserved for them.
Stock Market Debut:
Finally, the shares of the firm make their debut on a stock exchange the day the initial public offering takes place. Here, you, as an investor, can trade the shares, i.e., buy and sell them on an open market.
The Final Report
Following an IPO, the issuer is required to continue reporting to shareholders as a publicly listed firm in order to keep them informed. This includes filing the annual reports and making the relevant financial disclosures.
Key Takeaways
Summing up, IPO investment comes with its fair share of advantages and disadvantages. One excellent reason to invest in startups is their huge growth potential. In addition, participating in a company’s growth stages as an early investor can give you the chance to reap substantial gains. However, the flip side is that initial public offerings are not always a safe bet. There is a risk that many young public firms have short operational histories and questionable business concepts. You run the risk of losing money if the stock price fluctuates rigorously.
Yet again, prior to investing in any firm, it is mandatory to learn as much as you can. Look into the company’s background, check its growth prospects, verify the company, and look for any unproven concepts. Investments are all about risks, and you must stay informed before investing in any stock.