What is an IPO?

Savvy investors are well versed with initial public offering (IPO) process. On the other hand, the new entrants to financial markets it is essential to understand this process in detail.
COVID-19 pandemic has impacted economies across the globe, and as income levels are getting reduced, first time investors are attracted by the opportunity equity investment offering.

Theoretically, an IPO stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors.
Its a process by which a privately held company begins selling stock to outside investors, thus becoming a public company. From that point on, the company can raise the capital it needs by selling shares, but it must also comply with a strict set of reporting guidelines, as established by the markets regulator the Securities and Exchange Board of India (SEBI).

Why go for IPO….
As we know, all companies have to start somewhere, and often, it involves having the founders invest a chunk of their own money in the hopes of eventually growing the business. But as small, private companies start to gain traction, many come to find that they need outside financing to continue growing, and therefore decide to go public. And that’s where IPOs come in.

Most companies get their initial funding by emptying their bank accounts, taking out small business loans, turning to private investors or venture capitalists, or a combination thereof. But there often comes a point where more money is needed for a business to experience the growth it desires.
Enter the IPO. An IPO is the process by which a company first offers shares of its stock to new investors, thereby going public. And it’s a lengthy process at that.

What initially happens is that the company in question hires an investment bank (or several banks) to come in and underwrite the IPO. That bank will then put up a sum of money to fund the IPO and agree to buy the shares being offered before they’re actually listed on a public exchange. What’s in it for the bank? Ideally, profits in the form of paying less per share than what they end up selling for publicly.

To proceed with an IPO, a registration statement must be filed with the SEBI. That statement contains key information about the issuing company, including financial and ownership details. Once the SEBI approves the IPO, a date for it is set. The underwriter will then put forth a prospectus, which is a document outlining the issuing company’s finances. The underwriter will also work with the issuing company to set an initial stock price for when shares are made available to new investors.

The primarily benefit of going public is gaining access to a world of capital. That money can then be used for things such as expansion, research and development, marketing, and whatever else a company needs to grow and keep making money. But there’s a flipside, and it’s that once a company goes public, it’s required to adhere to SEBI reporting guidelines, which can be rather strict. Specifically, once public, a company will need to put out regular disclosure statements and share other such financial information with the world. Furthermore, that company will also need to start answering to its shareholders, which means that management loses some control in exchange for that additional funding. Still, it’s often a reasonable trade-off to make.

Are IPO good investment option….
Though IPOs can be good for the companies behind them, they’re not always great for investors — especially the inexperienced kind. Though investment in IPO can be profitable, it’s generally a much riskier prospect than investing in established companies with a strong history of solid performance. Though there are certainly exceptions, IPO stocks tend to underperform for several years after being issued compared to the general market. That’s because the companies behind them are usually more focused on growing the business than delivering profits to investors. Those inclined to invest in IPOs should therefore take the time to vet the issuing companies carefully before moving forward.

As we understand, the company which offers its shares, known as an ‘issuer’, does so with the help of investment banks. After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.
In recent times, IPO from companies such as Avenue Supermart (operator of D’Mart retail chain), Affle India, IndiaMART InterMESH, Polycab India, Neogen Chemicals, others have provided strong listing gains. Hence, investors are getting attracted to IPOs. Investors are advised to take precaution while dabbling in equities.

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