Initial Public Offering or IPO – the initial public offering of a private company’s first public stock sale has become a popular concept of buying stocks recently. Many investors consider this as an interesting and safer way to entering the stock market.
Companies typically issue IPOs because of the following reasons:
a. To generate additional capital for their business
b. To dilute shareholdings of existing promoters/venture capitalists
c. To liquidate their respective shareholders
d. To give a boost to corporate image
Why invest in IPOs:
As said earlier, investing in IPOs is possibly the best way to venture into stock investing if an individual is an early adopter and wish to invest in companies that are new to the share markets. Putting your money in a company through IPO not only provides you with an opportunity to make profits on listing but also it proves to be a worthy investment decision as price offered during IPOs are often attractive.
Companies tend to issue their shares cheaply and when these shares are listed on the exchanges later, they list at a premium which is higher than the price at which they were originally issued. This means that you as an investor can make a lot of money by selling off those shares.
If an investor does not want to sell the shares soon, he/she can always keep the shares with them and wait for the right time to sell as companies who are going public or listing their shares for the first time on the exchanges also usually offer their shares cheap, and could go on to become future success stories.
Companies typically issue two types of IPOs:
Fixed Price Issue: Here, shares are sold at a fixed price. This price is determined by the company in advance and the buyer can get the shares only at that decided price.
Book Building Issue: Book Building Issue is generally used when the issuer doesn’t want to fix a certain price on the security. Here, unlike the Fixed Price Issue, the bidder has the facility to bid for the shares within the given range/price band.
Things to remember when investing:
Before jumping in and buy shares of companies through the IPO route, investors need to consider certain factors to avoid any mistake:
1. Promoters of the issue: The company rolling out the issue should be analyzed carefully, especially its past record to be of great importance.
2. Pricing of the issue: This is an important factor and investors need look at various ways to determine the pricing of an offer. Read various reviews, compare the offer price with its peers in the industry, check various ratios, order books, future growth plans, risks etc.
3. Market Sentiment: Market sentiment is yet another important factor as this drives subscription of the issues. Investors should find out the reason for subscriptions of an offer.