What is IPO in stock market

What is an IPO? 

The full form of IPO is Initial Public Offering. When a company issues its common stock or shares to the public for the first time, it is called an IPO. IPO is issued by limited companies so that it can be listed in the stock market. After being listed in the stock market, the company's shares can be purchased in the stock market. The company issues an IPO to collect funding in case of investment or expansion. When a company issues its common stock or shares to the public for the first time in an IPO, it is called an IPO. The two main reasons for a firm to launch an IPO are to raise capital and to enrich the previous investors! 

Meaning of IPO for a company

After any company applies for an IPO, direct and indirect results come out, which are as follows: Through IPO, any company can increase its capital and use it for various needs. Companies which have less funds and small budget, can improve it through an IPO and the company's image or brand image can also be improved. People's trust in the company increases. The image of the company's management emerges and it has a name in the industry. Along with this, the following changes come in relation to some facts and information of the company: The company's balance statement and balance sheet become public. The company has to be listed as per the rules laid down by SEBI…

Meaning of IPO for investors 

Through IPO, traders and investors can expect to earn good profits from the stock market. An intraday trader hopes to earn quick profits through IPO and an investor takes it as a long-term investment. So if you are an investor who is thinking of keeping his money invested for a long time, then you should get complete information related to IPO and understand everything about the company. At present, the Indian stock market is touching new heights. If you are thinking about investing, then it is very important to know how and in which area you are going to invest your hard earned money. Types of IPO.

There are two types of IPOs:— 

 1. Fixed Price IPO 

 2. Book Building IPO 

Fixed Price IPO Fixed price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. Investors get to know about the price of the shares that the company decides to make public. The demand for shares in the market can be ascertained after the issue is closed. If investors participate in this IPO, they have to ensure that they pay the full price of the shares while applying.

Book Building IPO

In the case of book building, the company launching the IPO offers investors a 20% price band on the shares. Interested investors bid on the shares before the final price is decided. Here investors need to specify the number of shares they want to buy and the amount they are willing to pay per share. The lowest share price is known as the floor price and the highest stock price is known as the cap price. The final decision regarding the price of the shares is determined by the bids of the investors!

Purpose of bringing IPO 

When a company needs money, the company has two ways – either it takes a loan from the bank or it raises funds from the public. Now, when a company wants to raise capital from the public in equity, it gets listed on the stock market and issues its common stock to the public for the first time. This process is called Initial Public Offerings (IPO). 

Use of IPO funds

The funds raised through IPO are usually used for the following reasons. 

 1. Expansion of the company 

 2. Technological development,

 3. Buying new assets, 

 4. Eliminating debt etc. 

 As soon as an IPO is launched or proposed in the economic world, the shares of the company become available to various investors and traders. These shares can be bought and sold from the secondary market.

Are IPOs always successful?

This is not necessary, there are times when an IP O is launched that result in disaster for the company. Most of the time, many businesses pull out at the time of IPO launch.

At times, the bidding period is extended and in some rare cases the IPO is declared under low subscription by SEBI. 

For example, when it comes to failed IPOs, the first name that comes to mind is Reliance Power. This IPO performed so poorly that most investors had to bear a loss of almost 20% on the day of listing itself. 

The main reason behind this was the market momentum and investors not seeing any interest in the market. 

Some other failed IPOs include Cafe Coffee Day, Adlabs, ICICI Prudential, etc. Hence, the first thing any investor should do is to see if the IPO is worth investing in. Thus, before applying for an IPO, you should ensure that you are aware of the basics of IPO. IPO Terminology In this IPO review, we have brought for you.

Terminology related to IPO

which will be helpful for you. This is because whenever a company brings its IPO in the market, some special technical terminology is used while bidding, which is as follows: 

Let us understand it one by one:

Price Band: Generally, the price band is the range according to which you can bid for an IPO. 

Bid Lot – Bid lot refers to the minimum share quantity according to which or in its multiple, the customer has to bid for the IPO.

Registrar- Registrar is appointed by the particular company who is given the responsibility related to the work of IPO. He handles the investment, refund of customers' money and the entire IPO process as per SEBI.

 Issue Size: This refers to the total amount of shares on which you can bid. 

QIB - The percentage of shares that are kept for bidding by investor institutions is called QIB. 

NIB - The percentage of shares that are kept for bidding by non-investor institutions is called NIB. Retail - The amount of shares that are kept for bidding by retail investors is called retail.

Listing - The lists on which the IPO opens and is available for trading are called listing. 

 What is DRHP? 

Draft Red Herring Prospectus (DRHP) is a type of Offer Documents, which Merchant Bankers prepare in collaboration with the company bringing the IPO. This document contains detailed information about the company and its business.

Apart from this, DRHP also mentions the company's operations, promoters, financial health, its participation and role in the industry and its comparison with listed and unlisted rival companies. It is the responsibility of the merchant banker to ensure compliance with all legal rules. 

In this document, the company tells why it wants to raise money from the market, how much money it wants to raise and what it is going to use this money for. Apart from this, the company also has to tell the investors about the possible risks of investing in it.

In this, the company neither tells at what price it is offering the IPO nor how many shares it is going to sell. Instead, the company has to tell the price band. That is, at what maximum price and at what minimum price is it going to issue shares. The size of the issue and the number of shares are told later. 

The price of the shares is not disclosed openly until the bidding process is completed. Under the provisions of the Company Act, this information is not given to DRAC. It is also the job of merchant bankers to provide all the information to potential investors and protect their interests.

SEBI reviews this contract draft. After this, the merchant banker provides observation from his side. After this, the draft is filed again after making the relevant changes. This draft goes to SEBI, apart from this it is also given to the company's registrar and stock exchanges. The final document is reviewed and it is seen again that