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Everything You Wanted To Know About IPOs

February 1, 2022

The IPO landscape in India witnessed massive fundraising last year, worth more than 1 lakh crores. It was a record-breaking year, and the amount raised was nearly 62% more than the total raised in the three-year period between 2018-2020.

So, what exactly is an IPO?
Initial Public Offering, or an IPO, can be defined as the process by which a private limited company enlists its shares on a stock exchange, by virtue of which, the shares are made available to the public for purchase. While many individuals would think of an IPO as an opportunity to make huge amounts of money, it is important to understand that these investments are risky and that there are chances of them delivering inconsistent returns.
The company which puts the shares up for sale to the public is called an “issuer”, and the guidance required to take the company public is provided by multiple investment banks. Once the IPO is received, the shares of the company are made public which are then traded into the open market and are bought or sold by the investors in the stock market.
Taking a company public is a challenging and time-consuming process, which requires intensive paperwork and a lot of preparation, since the company will be open to public scrutiny after receiving the IPO. Therefore, most companies planning an IPO hire an underwriter, which in most cases, is an investment bank. The investment bank takes care of providing relevant guidance to the company and helps them set a reasonable initial price for the public offering. The underwriter also helps them set up for the IPO by creating key documents for the investors and also scheduling meetings for potential investors.

How does investing in an IPO benefit you?
While there are no guarantees, investing in an IPO can help you reap the benefits of a lifetime.
● Investing in the initial public offering lets you be a part of the company from the initial public growth. Being a part of the company right from the start gives you the opportunity to have significant growth in a very short span of time. Even in the long run, the company may have the prospects of providing substantial returns.
● More often than not, the IPO price is the cheapest price of investment. This is because the price is the initial public offered price, which changes post the IPO issue. The prices of the shares after the IPO would depend on the market rates and the best rates that brokers can offer. Therefore, getting a chance to have the shares of a company at the lowest price is never a bad option.
● Depending on the number of shares that are owned by an individual, they are entitled to dividends and bonuses as earned by the company. The sharing of the dividends is shared prior in an open declaration by the management of the company.
● Provided that the company has a stable business model and good financial performance, investing in the company during an IPO can result in the creation of substantial long-term wealth and can fulfil your financial goals.

Why an IPO investment might not always be beneficial?
Just like any other investment opportunity, while there are definitely huge rewards to be had, there are also risks associated with the same.

● Investing in an IPO carries the same factors and, in most cases, investing in an IPO is associated with more risk than investing in the shares of a public company which is already established. The main reason for this is that there is very little information available to the public before the investment is made, and there are a lot more unknown variables at play.
● It is not mandatory that an IPO will perform well even if the public is excited and waiting for the company to become public. If the business model and the financial performance of the company is not upto the mark, it can still prove to be a bad investment.

Despite the fact that IPOs sometimes do end up letting investors earn a huge amount of money, more often than not, the statistics are the other way around.

What do you need to know before investing in an IPO?
● In case you want to make an investment in an Initial Public Offering, the first thing that you need to do is conduct a thorough background check of the company that you are looking to invest in.
● It is imperative that you go through their prospectus and understand the goals of the company for issuing an IPO. Furthermore, you can also analyze how the company is looking to spend the funds.
● These factors aside, it is crucial to realize that the market landscape and the competition can affect the performance of an IPO, which in turn can make the investment go bad.

In 2022, it is expected that IPO numbers will grow even more, with several tech companies entering the market. You should conduct thorough analysis and research before you invest in any IPO. Although the initial offering price is much lower, it is difficult to get an allotment for the IPO. Therefore, the alternative route is to invest in an IPO through a Mutual Fund. You should always consult your financial advisor before investing and be aware of the market risks that come with the investments.