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IPO (Initial Public Offering), How to Invest in IPO, How to Invest in IPO in India

IPO: What is IPO, How to Invest in IPO, IPO Allotment Process

In India, many people invest in IPOs. The question that arises here is, why do they do that? What is the secret behind it? So the secret is that in the last 5 years, all the IPOs that have emerged, on average, have generated returns at the rate of 18.41% in the short term and 66.99% in the long term. IPO is a means of investment in which the investment winning probability is very high. Further, the questions that pop up are: What exactly is an IPO? How does IPO work? What is GMP in IPO? How to invest in IPO Through Zerodha and Upstox?

What is IPO

In this article, we are talking about what an IPO is & how it works. We'll also tell you, how to invest in an IPO. Along with that, we'll learn IPO analysis. How to search for winning IPOs, and several other questions related to IPOs will be discussed today. You'll gain all the knowledge, A-Z, about IPOs in this article including the IPO allotment process.

    What is IPO?

    When a company issues money from the stock market for the first time, then the process is known as an IPO (Initial Public Offering). Borrowing money from the stock market equals borrowing money from the public. In an IPO, a company sells its shares to investors and gains funds in return. Different purposes like business expansion, product and services launch, and debt repayment can be served using these funds.

    An IPO is known as a primary market because you are directly purchasing shares from the company, and the company is also directly raising funds from you. But as soon as the shares are listed on the stock exchange, they are traded between many different investors. There is no direct involvement of the company there. This is why the stock exchange is also known as the secondary market. The ups and downs throughout the day in the stock market don't affect the company to a great extent. Only the market capitalization of the company is affected a bit.

    Check IPO Performance Tracker.

    Whenever a company wants to create an IPO, they first hire some investment banks. They help the company to complete IPO-related processes.

    Then the company and the investment banks prepare its DRHP (Draft Red Herring Prospectus). It has all the information associated with the company. Such as the company's product and services information, management and founder details, information about the cases against it, and the company's risks & rewards details can be found in the DRHP. 

    In short, a DRHP is a very important document of the company, which comprises all the important information regarding the company. The DRHP is submitted to SEBI (Securities & Exchange Board of India) by the company. SEBI is India's capital market regulator. It regulates the stock market. SEBI is vested with the power to decide whether or not the approvals should be granted to the company.

    After submitting the DRHP to SEBI, it will either quickly grant IPO approval or tell the company that it needs more information. Further, the company needs to submit the required additional information. Then, SEBI will decide what to do. If SEBI thinks that the company is not eligible for an IPO, then SEBI won't approve its IPO application. Know about upcoming IPOs for investing in it.

    Process of the IPO

    So let's talk about the following process. As soon as the company gets approval for an IPO from the SEBI, it starts working along with the investment banks on the IPO dates & the price band. Investment banks know one thing very well. When the stock market is at its peak (which is generally called the bull run), the investors are interested in newer investments, too. That is why most companies opt for an IPO at the time of a bull run in the stock market. 

    Conversely, in a bear run, i.e., the period when the stock market is crashing or is facing a rapid decline, no company favors launching an IPO in that period. Because then, investors tend to stay away from markets and investments. Talking about March 2020, due to the Coronavirus Pandemic, there had been a crash in the markets. During that period, no company had launched its IPO.

    As soon as IPO dates are declared, the investors analyze the company and decide whether they should invest in the IPO or not. We'll talk about IPO analysis a bit later. Now, the price at which a company issues its IPO, there are two types of IPOs based on it. The former is the 'Fixed Price' issue, while the latter is a 'Book Building' issue. 

    In a fixed price issue, you are provided with a fixed price. For example, Infosys brought its IPO in the year 1993, then the price of that IPO was fixed at ₹95 per share. So when a company maintains a fixed price, it is called a fixed price IPO.

    Meanwhile, Happiest Mind kept a price band instead of a fixed price. Happiest Mind's price band was ₹165-₹166 per share. IPOs that provide such price bands are called Book Building IPOs. Investors can bid on any price within the range of the price band.

    How to invest in IPO

    How to invest in an IPO?

    Now let's talk about the process of buying an IPO. You'll understand more clearly in the live demo. So come on, let's see how we can buy an IPO.

    Next, open your UPI app and approve the payment. The payment won't be directly deducted and the amount will be blocked. This means that if you are allotted shares on the share allotment day, only then will the amount be deducted and you will receive the shares in your Demat account. But if you are not allotted shares on the allotment day, then the blocked amount will be unblocked. Thus, you can very easily invest in an IPO. 

    Let's see how these shares are allotted. Because, as we discussed previously, bidding in an IPO doesn't ensure the allotment of shares. So let's understand the entire allotment process of the IPO.

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    Allotment process of IPO

    Whether or not you will be allotted IPO shares depend upon the number of times it has been subscribed. E.g., if a company is selling its 100 crore shares in an IPO, and investors bid for 1000 crore shares, then it can be said that the IPO has been subscribed 10 times. If a company is issuing its 100 crore shares in a retail quota, and investors also bid for 100 crore shares, then all the investors who had subscribed to the IPO will be allotted shares.

    But for 100 crore shares, if the investors bid for 1000 crore shares, then it is difficult for everyone to get shares. In that case, the allotment of shares is done based on a lottery system. The first thing that is ensured is whether each investor can be allotted at least one lot. If that happens, well and good, or else the lottery system is used to allot the shares.

    If an IPO has been oversubscribed, e.g., DMart's IPO & IRCTC's IPO was oversubscribed, and several other IPOs have also been oversubscribed recently. In these cases, the lottery system was used, wherein allotment was dependent on the luck factor. So in the IPO allotment, the luck factor also plays an important role.

    What should be kept in mind for IPO allotment?

    Many people think that if they apply for more than one lot, they'll certainly be allotted one. But that is not the case. If the IPO has been oversubscribed, then even if you subscribe for ₹10 lakhs - first of all, it will be ensured whether every investor is getting at least ₹1 lakh. Otherwise, shares will be allotted by a lottery system and everybody will receive a maximum of one lot.

    Many people open multiple Demat accounts & apply for a different lot via each account. But this is the wrong strategy. No matter whether you have 10 Demat accounts, your PAN Card is still going to remain the same. So the bids are not counted as different but as one.

    Many a time, people open their family members' Demat accounts and then apply for different lots via them, so that the chances of allotment increase. I'll divulge one more trick. If an IPO - in the first two days itself - is hugely oversubscribed, about 10 times oversubscribed; apply to only one lot through your account. There is no sense in applying for more than one lot because anyways, the IPO has been oversubscribed. The shares are going to be allotted only by the lottery system.

    Profit from IPO

    Now let's talk about the most important thing: Profits. In an IPO, you can gain profits in two ways. The first is 'Listing gains' and the second is by holding the shares. 

    First of all, we will talk about listing gains. Many investors in India invest in IPOs so that they can gain profits through listing gains. People apply to IPOs, and the day these shares are listed on the stock exchange, they sell them on the very same day. So, people who invest for listing gains exit the very day on which the shares are listed and book their profits. Thus, many people invest in IPOs for earning listing gains.

    Now, many people also favor holding shares for the long term. People who think that a certain company can perform well and that its business will also take off in the long term hold the shares purchased from IPOs for the long term. Let's see the data behind this. All the IPOs that have emerged in the last 5 years, every one of them on average has generated returns at the rate of 120% in the long term. All the IPOs that have emerged in the last 10 years, every one of them on average has generated returns at the rate of 66.99% in the long term.

    Check out our free tool Stock Average calculator. 

    How to analyze IPOs? 

    Be it for Listing gains or for Holding gains, let's understand how to analyze IPOs or more importantly, searching winning IPOs. As far as listing gains are concerned, they are short-term gains. 

    How to do IPO Analysis for Listing or Short-term gains?

    You have to track 3 important things here. The 3 important things to analyze IPO for short-term gains

    (1). The first thing is to observe the trend. Observe the nature of discussions about the IPO and the degree of enthusiasm among investors related to the IPO. 

    (2). The second thing to be checked is the subscription. Never subscribe to an IPO on the first day itself. Generally, most the IPOs are open for 3 days. So don't subscribe to the IPO on the first day itself because IPO allotment is not on a first come first serve basis. Even if you bid on the third day, your chances of being allotted a share are equal to those of an investor bidding on the 1st day. Thus, you need to wait for 1-2 days and observe the nature of bidding. If there is huge bidding in the first two days, then it makes sense for you to bid on the 3rd day. Otherwise, you can skip. 

    (3). The third important thing that you should check is Grey Market Premium, aka GMP. GMP is an unofficial market & is also illegal. The Grey market is where the trading of shares takes place outside the stock market. The premium here is greater than the IPO price. If the price of an IPO share is ₹100 and there's a 5% grey market premium, it means that the price of the same share in the Grey market is ₹105. If the GMP of a share is too high, then the chances are that it will give you greater returns in the short term. 

    But you also have to make sure that the GMP is consistent. Many a time, the GMP is very high at the beginning. But as the IPO dates keep on nearing, it goes on decreasing gradually. Often, GMP reduces and equals the IPO prices or even becomes lesser than that. If the GMP is consistent till the IPO date, well and good.

    Also, Read: How to do Technical Analysis.

    Now let's talk about how to do IPO analysis that you buy in the long term. 

    How to do IPO Analysis for long-term gains?

    When you plan to invest in an IPO for the long term, the most important thing you should check out is the company's Red Herring Prospectus. As we discussed earlier, a Red Herring Prospectus comprises all the information about a certain company. It contains information regarding the management of the company, its financial statements, its risks and rewards, and other important facts.

    You can assess the company's growth potential based on it. People who invested in DMart's parent company Avenue Supermarts for the long term saw the company's future growth potential. People who invested in IRCTC for the long term saw the company's monopoly. So you also have to check out such growth factors and decide based on that. Along with that, also keep in mind factors like valuation, etc. 

    In Fundamental analysis, we analyze the company's financials, its management analysis, and its growth factors. In fact, we're going to talk about choosing a company and searching for a winning company and all these topics in extreme detail.

    Also, Read: Top 10 Best Stock Market Movies (Video).


    Investing in IPO can be a good option. But it is necessary that you must first plan whether you want to apply for listing gains / short-term gains or apply for long-term gains in that IPO. Also, before applying for IPO, you should do the fundamental analysis and financial analysis of that company.

    FAQs about IPO

    What is the Full form of IPO?
    IPO Full form is Initial Public Offering.

    How to invest in IPO through Zerodha?
    This article provides detailed information on how to invest in IPO through Zerodha.

    How to invest in IPO in India.
    If you want to invest in IPO in India then you must have the following eligibility: 1. PAN card 2. valid Demat account.

    How to Invest in IPO through Upstox?
    This article provides detailed information on how to invest in IPO through Upstox.

    Minimum amount to invest in IPO in India
    The minimum amount to invest in IPO in India depends on the company bringing the IPO. However, the amount for one lot in any Mainboard IPO shall not exceed ₹15,000.

    What is the cut-off price in IPO?
    Every IPO has a price band to apply for. Investors can bid at any price within the range of the price band. The maximum price in this price band is called the cut-off price. For example, the IPO of XYZ Company has a price band of ₹200 - ₹220 where the cut-off price would be ₹220.

    We hope you like this article about IPO (Initial Public Offering). If you have any queries or feedback, Post a Comment.

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