STOCK MARKET BEGINNER GUIDE -9 - WHAT IS AN IPO - HOW TO APPLY - MEANING & BENEFITS

 MUMTAAZ SHEIKK

Learn what an IPO is, why companies launch IPOs, how to apply for IPO in India, allotment process, benefits and risks. Complete beginner guide to IPO investing.

Introduction: The First Step into Equity Investing

Before a company’s shares trade in the stock market, there is a special event called an IPO.

Many beginners first hear about stocks through IPO news:

“XYZ IPO opens tomorrow”
“ABC IPO oversubscribed 20 times”

But what exactly is an IPO?
Why do companies launch it?
How do investors apply?
Is IPO investing safe?

This guide explains IPOs from absolute basics.

What Is an IPO?

IPO = Initial Public Offering

It means: HOW TO SELL SHARES - DEMAT SELLING- SETTLEMENT CYCLE

A private company offering its shares to the public for the first time.

After IPO:

✔ company becomes publicly listed
✔ shares trade on stock exchange
✔ anyone can buy shares

Simple IPO Example

Imagine a company owned by founders and investors.

It needs money to expand.

Instead of taking loans, it sells ownership to public.

That first public sale = IPO.

Why Do Companies Launch IPOs?

Companies go public mainly to raise capital.

But there are multiple strategic reasons.

1️⃣ Raise Expansion Capital

IPO funds are used for:

• business expansion

• new projects

• acquisitions

• R&D

• infrastructure

This accelerates growth.

2️⃣ Reduce Debt

Some IPO money repays loans.

Lower debt improves:

• profitability

• balance sheet

• credit rating

3️⃣ Provide Exit to Early Investors

Early investors (VCs, PE funds) sell shares in IPO.

This allows them to:

• book profit

• exit investment

• recycle capital

4️⃣ Increase Brand Credibility

Listed companies gain:

• public trust

• brand recognition

• transparency reputation

Being listed signals stability.

5️⃣ Create Market Value

IPO establishes company valuation.

After listing:

share price reflects market perception.

What Happens After IPO?

Once IPO completes:

Company shares list on:

• National Stock Exchange

• Bombay Stock Exchange

Then shares trade like any stock.

Who Can Invest in IPO?

Anyone with:

✔ Demat account
✔ Trading account
✔ Bank account

Can apply for IPO in India.

Types of IPO Investors

IPO shares are reserved for categories:

Retail investors (individuals)
HNI (high net worth)
Institutional investors

Retail category has reserved quota.

How IPO Pricing Works

Companies don’t choose price randomly.

There are two main pricing methods.

1️⃣ Fixed Price IPO

Company sets one price.

Example:

IPO price = ₹100

Investors apply at ₹100.

2️⃣ Book Building IPO (Most Common)

Company sets price range.

Example:

₹100–₹110

Investors bid within band.

Final price = discovered via demand.

What Is IPO Lot Size?

IPO cannot be bought in single shares.

You must apply in lots.

Example:

1 lot = 50 shares
Price = ₹100

Minimum investment = ₹5,000

How to Apply for IPO in India (Step-by-Step)

IPO application today is fully digital via ASBA.

ASBA = Application Supported by Blocked Amount.

Money stays in bank until allotment.

Step 1: Login to Broker or Bank

You can apply via:

• trading app

• net banking IPO section

Step 2: Select IPO

Active IPOs are listed.

Choose the IPO you want.

Step 3: Enter Bid Details

You select:

• price (cut-off recommended)

• quantity (lots)

Step 4: Submit Application

You approve via:

UPI mandate
or bank ASBA

Money is blocked, not debited.

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What Happens After Applying IPO?

IPO process timeline:

IPO open → 3 days
IPO close
Allotment finalised
Shares credited
Listing day

IPO Allotment Explained

Demand usually exceeds supply.

So not everyone gets shares.

Allotment depends on:

• subscription level

• category quota

• lottery system

Oversubscription Meaning

If IPO has 1 lakh shares
But applications = 10 lakh

IPO is 10× oversubscribed.

Allotment probability reduces.

What Happens If You Don’t Get IPO?

Blocked money is released.

No charge deducted.

What Happens If You Get IPO?

Shares credited to Demat.

You become shareholder before listing.

IPO Listing Day

First day of trading on exchange.

Listing price may be:

Above IPO price → listing gain
Below IPO price → listing loss

What Is Listing Gain?

IPO price = ₹100
Listing price = ₹130

Gain = ₹30 per share.

Many IPO investors aim for this.

Why IPOs Attract Investors

IPOs are popular because:

Potential listing gains
Early entry into company
High growth potential
Media attention

Benefits of Investing in IPO

Early Ownership

Invest at first public price.

Before market trading begins.

Potential High Returns

Successful IPOs can multiply.

Example: many Indian IPOs delivered large returns over years.

Growth Participation

You invest at early public stage.

Before full expansion.

Transparent Information

IPO prospectus provides detailed data.

Financials, risks, plans.

Risks of IPO Investing

IPO is not guaranteed profit.

Overvaluation Risk

Some IPOs are priced too high.

Listing price may fall.

Hype-Driven Demand

Media hype inflates demand.

Fundamentals ignored.

New Company Risk

Public track record limited.

Future uncertain.

Listing Loss Possibility

IPO ₹500
Listing ₹420

Immediate loss.

Should Beginners Invest in IPO?

Yes — but selectively.

IPO is not always safe or profitable.

Quality matters.

How to Evaluate an IPO (Beginner Basics)

Before applying, check:

Company profit history
Revenue growth
Debt level
Industry position
Valuation vs peers

IPO vs Buying Listed Shares

IPO:

Early stage
Unknown price discovery
Hype driven

Listed stock:

Market tested
Chart history
Price clarity

Both have roles.

Long-Term vs Listing Gain IPO Strategy

Two common IPO approaches:

Listing gain selling
Long-term holding

Choose based on goal.

Example IPO Journey

Company ABC launches IPO ₹200.

You apply 1 lot (50 shares).

Allotment received.

Listing price ₹260.

Profit ₹60 × 50 = ₹3,000.

Or hold long term.

Why IPOs Matter to Economy

IPOs enable:

Business growth
Capital formation
Job creation
Innovation funding
Public wealth creation

They connect savings to enterprise.

Famous IPO Success Stories (India)

Many major companies were IPOs once.

IPO investors benefited massively long term.

Shows power of early entry.

Common IPO Mistakes Beginners Make

Applying blindly for all IPOs
Ignoring valuation
Applying huge capital
Chasing hype
Selling panic on listing

IPO investing needs judgment.

Key IPO Terms Beginners Should Know

Issue price
Price band
Lot size
Subscription
Allotment
Listing
Cut-off price
Prospectus

IPO Investing Checklist

Is company profitable?
Is growth strong?
Is valuation reasonable?
Is industry strong?
Is debt manageable?

If yes → consider.

Final Thoughts

An IPO is the moment a company enters public markets.

It allows:

companies → raise capital
investors → own businesses
economy → grow

For beginners, IPOs are often the first step into equity ownership.

But like all investing:

knowledge before money.