Are you wondering how to buy IPO shares? In this article, we give you a definite answer. Not just that, we will also help you understand what an IPO is, what benefits can you make from IPOs, and how to invest in an IPO online.
What is an IPO
Initial Public Offerings or IPOs are shares that are listed on the Primary market. The securities that are listed and traded on the BSE or the NSE make up the secondary market. Once IPOs launch, they become a part of the secondary market and join the group of equities that are listed on the stock exchanges and become ordinary equities.
However, shares are not exchanged between investors in the primary market but are assigned and allocated by the company issuing the shares. Doing so would enable the company to raise money in return for the IPO. This money is first justified to SEBI on what account it is being raised.
To make your IPO application, you would have to first sign up with a broker. Once you fill in the application, the broker sends a bank mandate via their connected UPI apps. Till the time the listing hits the market, your mandate would freeze the IPO amount in your bank account. If you do not receive the allotment, your mandate will be reversed and the amount will be freed. If you do get the IPO shares allocated, your amount will be debited to the company and broking houses as per their cut.
Usually, this money is used to expand business and fund more profitable avenues. Based on the proposal submitted by the IPO managing and backing houses, a price is fixed for the IPO.
For those who subscribe to the IPO, that becomes the buying price of the shares.
Depending on how an IPO is priced, it can be of two broad formats:
Fixed priced IPO
As the name suggests, this IPO has a fixed price, which is to be paid by the investor.
Book building IPOs
Rather than a fixed price, there is a range of 20% in the buying prices.
Nowadays, most IPOs fall in the latter group. You have to subscribe to an IPO issue, and based on the number of subscribers, you get your shares via a lottery system. The process is fully automated, which means the allotment is made in a fair and unbiased way.
Once you receive the IPO shares in your account, you can trade them on the stock exchanges.
However, it is more profitable to keep the shares for the long run if the company issuing them is likely to benefit from the IPO funds.
In most cases, profit-making companies never return to their listing price, and if an investor has already sold them and plans to buy the same company’s shares later, they would have to pay top rupee for it.
This alone makes for a good case in favor of IPOs, however, there are more reasons why you should invest in IPOs. In the following section, we look at some.
Why Should You Invest in IPO
An attractive feature of IPOs is they can often get a 20-30% higher listing than the issue price, which means a quick wealth appreciation!
Opens new investment frontiers:
When a company launches the issue, their private status goes public, which means there are more companies in the stock market for you to choose from.
Early bird catches the worms: In case of quality fresh launches, the price may accelerate right after the listing, making it difficult to purchase because of hyper-pricing. If you do get the IPO allotted, you’ll have great equities in your portfolio at much lower costs.
Before you invest in IPOs
Keep in mind that not all IPOs open green, some may open at listing prices lower than their premium or the issue price.
This is why experts recommend you research and pick a firm that suits your risk appetite. This applies to not just primary but also secondary market investments.
Subscribing alone doesn’t guarantee allotment. The computer-generated lottery is based on chance.
How to invest in IPO in India
You would need a reliable broker. TradeSmart can help you keep a tab on upcoming IPOs, apply for them in a few clicks, and check your allotment status.
To do so, you would first need to go to the TradeSmart website and sign up. Once you have signed up and filled in your KYC details, your account will be opened within 24 hours, which is faster than other brokerages and costs less.
Once your Demat account has been opened, you can apply for IPOs. On the day of the listing, the shares will also be made available in your trading account for you to engage in their exchanges.