About IPO
When a private company decides to go public, it does so through a process called an Initial Public Offering (IPO). This is when a company sells its shares to the public for the first time, allowing individuals and institutions to own a part of the business.
To launch an IPO, a company works closely with investment banks to prepare everything, from conducting thorough research to meeting legal requirements and promoting the IPO to potential investors.
Initially, these shares are typically offered to large investors like hedge funds, banks, and other financial institutions. This makes it harder for regular investors to buy shares during the IPO launch. However, once the IPO is complete and the company is listed on the stock market, anyone can buy and sell its shares.
There are two main types of markets where shares are traded:
- Primary Market: This is where IPOs happen, and the company sells its shares directly to investors for the first time.
- Secondary Market: Once shares are sold in the IPO, they can be traded between investors in the stock market, like the NSE or BSE in India.
In simpler terms, an IPO is the first step for a private company to become public and invite investors to be part of its journey.
Who Can Invest in an IPO?
Anyone can invest in an IPO, provided they meet certain requirements and follow the process. Here’s a breakdown of who can participate in an IPO:
1. Retail Investors (Individuals)
- Regular investors like you and me fall under this category.
- Retail investors can apply for IPO shares through their Demat account using online trading platforms or apps.
- Most IPOs allocate a certain percentage of shares specifically for retail investors.
- There’s usually a maximum investment limit for retail investors (typically ₹2 lakh in India).
2. Institutional Investors
- Large organizations like banks, mutual funds, insurance companies, and pension funds fall into this category.
- They are known as Qualified Institutional Buyers (QIBs) and are typically allotted a major portion of the IPO shares.
- They invest significant amounts and play a key role in determining the success of the IPO.
3. High Net-Worth Individuals (HNIs)
- These are individual investors who invest more than ₹2 lakh in an IPO.
- HNIs don’t fall under the retail category and typically receive a separate allocation.
4. Foreign Investors
- Foreign Institutional Investors (FIIs) or Non-Resident Indians (NRIs) can also participate in IPOs, subject to the country’s regulatory guidelines.
- They need to have a valid Demat account and adhere to specific documentation requirements.
5. Employees of the Company
- In some cases, companies reserve a portion of IPO shares for their employees as a benefit.
- These shares are often offered at a discounted price compared to the general public.
Requirements to Invest in an IPO
To participate in an IPO, you’ll need:
- A Demat Account: To hold the shares electronically.
- A Trading Account: To place orders and apply for the IPO.
- A Linked Bank Account: For making payments via ASBA (Application Supported by Blocked Amount).
Pre-Requisites for Applying for an IPO
Applying for an IPO is an exciting opportunity to invest in a company’s growth story, but there are a few essential requirements and steps to keep in mind:
1. PAN Card
- A valid Permanent Account Number (PAN) card is mandatory to apply for an IPO in India.
- Applications without a PAN card are rejected.
2. Demat Account
- You must have a Demat account to apply for an IPO.
- This account is used to store the shares in electronic format once they are allotted.
- You can open a Demat account with any SEBI-registered Depository Participant (DP), such as banks or stockbrokers.
3. Bank Account with ASBA Facility
- Your bank account must be ASBA-enabled (Application Supported by Blocked Amount).
- This ensures that the required IPO amount is blocked in your account and is only debited if shares are allotted to you.
4. UPI ID (Optional for Retail Investors)
- Retail investors can apply for IPOs using their UPI ID, which allows seamless payments and application through trading apps or bank portals.
5. Trading Account (Optional)
- While a trading account is not required to apply for an IPO, you will need one if you wish to sell your shares after they are credited to your Demat account.
Other Important Factors to Consider
- Research the Company:
- Study the company’s financials, business model, growth prospects, and the risks involved.
- Check the IPO prospectus and read reviews to make informed decisions.
- Minimum Investment Amount:
- Understand the minimum lot size for the IPO, as you cannot invest less than the minimum required amount.
- Monitor Past IPO Trends:
- While the IPO market has been rewarding, some companies may not perform well post-listing. Proper research is key to identifying good opportunities.