UNDERSTANDING INITIAL PUBLIC OFFER
UNDERSTANDING INITIAL PUBLIC OFFER(IPO)
The initial public offering (IPO) market after a gap of many years has again become the hottest sector in the Indian financial market since a lot of money has been made in the last few months.
WHAT IS AN IPO?
INITIAL PUBLIC OFFERING is a process which enables unlisted or private companies to go public so as to raise capital either to repay debt or business expansion or for promoter to dilute stake in the company. It's is a great way through which an individual can buy a stake in the company which previously was not possible.
IPO basically represents the first time, a company will financially benefit by the issue of its stock. However, post the Initial Public Offering, the underlying company will not receive any compensation but the share transfer will take place between buyers and sellers in the open market.
The underwriting investment bank introduces IPO in the market which also helps the company in getting potential investors.
Moreover, the underwriter also helps in settling the price at which it will be issued to the public.
Procedure of Initial Public Offering
Soon after the company wants to go public, it hires the investment bank to manage the entire procedure. Further, both of them decide the amount of funds to be raised, type of securities to be issued and other necessary details.
The underwriter then puts everything in a document called Red Herring Prospectus. This document contains all necessary details about the company except for the effective date and the offer price.
In general, the IPO is open for 3-7 day, but however, the actual number of days it will be open is decided by the issuing company and its lead manager.
The upper cap on the value of the investment made in an IPO by a retail investor stand at Rs 2,00,000.
(WHAT IS IPO?
How to decide that which IPO to opt for?
The following are the important points you should consider before investing in an IPO-
1. Higher promoter stake is always preferable as it tell us about the sense of responsibility and preferably the promoter will try to take the company to new heights.
2. Look for the issue size of the IPO. Bigger the issue size, higher is the promoter's capability.
3. Do not forget to conduct a background check on promoter's capabilities.
4. Look for the projects in the pipeline and also its size as it will tell us about company's scalability going forward.
5. Lastly, in case of big companies, do not involve in speculative gains but focus on long-term wealth creation.
Conclusion
There are both pros and cons associated with an IPO.
Hence, before you invest in an IPO, its always preferable to devote a lot of time into research since it will provide you with valuable insight both about the company and the people managing the same.
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