When investors are interested in investing their money, they look for good IPOs. But many Initial Public Offer (IPO)s are flooding the markets in 2021, and investors have to be very careful to pick the best IPO stock.
Hence, it is essential to know how IPO works in the stock market.
What is an Initial Public Offering (IPO)?
Initial Public Offering (IPO) is the process through which a private company goes public by issuing shares to the public. It allows a company to raise capital from public investors.
A company (could be new or old) decides the take the route of IPO when they look for capital to expand the business.
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How IPO Works in Stock Market?
An IPO is a significant step for a company as it provides massive capital, tremendous exposure, and a more remarkable ability to expand further.
If a company decides to raise funds through IPO, it must meet the exchanges and the SEBI requirements.
Company members take the help of merchant bankers and other experts to decide the price of a share.
If an investor decides to own the shares at the IPO launch, he must apply early through an online stock broker like Zerodha, Sharekhan, ICICI Direct, Angel Broking, Upstox, etc. Ensure to have a valid PAN Number updated with the broker to avoid any compliance issues.
Read this post to know the life cycle of an IPO.
Applying for shares in an IPO will not give any guarantee to get the shares. IPO shares allotments happen through a bidding process, and hence allocation depends on the bidding price and available quantity.
A company offering its shares to the public through IPO is not obliged to repay the capital to public investors.
After the IPO launch, the newly listed company's shares are traded in an open market.
What is Book Building?
SEBI guidelines define Book Building as "a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document".
It is a process used in the IPO to arrive at the price of a share efficiently. It is a relatively new concept in India.
IPO Investment is good or bad?
Certainly, IPO provides an opportunity for the investors to board the train early, but not all the stocks give a good move after the debut.
There is no guarantee whether investors get any share or not. Most of the IPOs are oversubscribed in India, and hence small investors don't get any allotment or get fewer shares at higher prices.
Besides, investors' money is also locked for some time (from the application date to the allotted date).
Sometimes, many shares start trading on the downside compared to the listing price, which is a significant risk to the capital.
Hence, if you are looking for some investment, then shortlist only the companies with a clean reputation and fair listing price.
In contrast, investors can also invest in multi-bagger stocks through the Dow Theory method.
Largest IPOs to date
(Courtesy – Investopedia)
IPO Calendar - Upcoming IPOs (NSE)
Below are some of the companies which are making their IPO debut in 2021.
Conclusion
Many companies are making their debut in IPO, and investors will have a tough time picking the good companies.
However, an investor can perform the below checks to pick the best ones:
Assess the past performance of the company
Read the company's plan in detail to know how they are planning to utilize the raised capital
Verify the background of promoters of the company
Verify the sector's performance and the growth potential of the company within the sector
Check the pricing details and ensure a company is not floated its value
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