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What is IPO? How to Invest in IPO and Earn Money

Have you ever heard stories about people doubling their money by investing in IPOs? Some investors even face losses. It’s a fascinating world, and if you’re curious, this article will answer your questions. We’ll break it down step by step, covering what an IPO is, how it works, and how you can invest wisely. Let’s explore!

What is an IPO?

IPO stands for Initial Public Offering. When a private company decides to go public, it offers its shares to the public for the first time. These shares represent partial ownership of the company. Companies raise funds through IPOs to expand their operations, pay off debts, or allow early investors to exit.

For example, imagine ABC Company runs 10 factories but wants to expand to 100. Setting up these factories requires significant funds. After exhausting other sources, like venture capital, the company decides to go public. By listing on stock exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE), the company can legally raise money from the public.

Why Do Companies Launch IPOs?

Here are the main reasons why companies opt for IPOs:

  1. Expansion: Companies need funds to grow their business, increase production, or enter new markets.
  2. Debt Reduction: Companies burdened with loans may use IPO proceeds to repay debts.
  3. Investor Exit: Early investors, like angel investors or venture capitalists, often cash out during IPOs, earning profits on their initial investment.

Who Can Invest in an IPO?

When an IPO is launched, there are three main categories of investors:

  1. Qualified Institutional Buyers (QIB):
    • These include mutual funds, insurance companies, and large corporations.
    • QIBs often get up to 50% reservation in IPO allotments.
  2. Non-Institutional Investors (NII):
    • High Net Worth Individuals (HNIs) who invest more than ₹2 lakhs fall into this category.
    • They typically have a 15% reservation.
  3. Retail Investors:
    • Individuals investing less than ₹2 lakhs are retail investors.
    • 35% of the IPO shares are reserved for this group.

How Does IPO Allotment Work?

When a company offers shares through an IPO, the demand often exceeds the supply. For example, if 35% of the shares are reserved for retail investors and twice as many people apply, the IPO is said to be oversubscribed. In such cases:

  • Shares are allotted through a computerized lottery.
  • Investors may not receive the full amount of shares they applied for.

Shares are offered in “lots.” A lot represents a fixed number of shares, and you must purchase at least one lot to participate. For instance, if one lot contains 140 shares priced at ₹100 each, you’ll need ₹14,000 to invest in that IPO.

Types of IPO Investors: Speculators vs. Long-Term Investors

  1. Speculators:
    • They invest hoping for quick gains when the IPO lists on the stock exchange.
    • For example, if a share is issued at ₹100 and lists at ₹200, they sell immediately to book profits.
  2. Long-Term Investors:
    • They focus on holding shares of quality companies for years, aiming for substantial returns over time.
    • For example, Jubilant Food’s IPO shares, issued at ₹145, are now valued at over ₹3,000.

How to Invest in an IPO?

Follow these steps to invest in an IPO:

  1. Open a Demat Account:
    • A Demat account is essential for buying and holding shares.
    • Popular platforms like Angel Broking and Zerodha offer easy account setup.
  2. Study the IPO:
    • Research the company’s financials, future growth potential, and management team.
    • Check the company’s “Red Herring Prospectus” for detailed information.
  3. Apply for the IPO:
    • Log into your Demat account.
    • Navigate to the IPO section and select the IPO you want to apply for.
    • Enter the number of lots you wish to purchase and submit your application.
  4. Wait for Allotment:
    • If shares are oversubscribed, allotment will depend on a lottery system.
    • Refunds are issued for unallotted shares.
  5. Listing Day:
    • Once the IPO is listed on the exchange, you can sell or hold your shares depending on your strategy.

What is the Gray Market Premium (GMP)?

The gray market is an informal platform where shares are traded before the IPO listing. A high GMP indicates strong demand and potential listing gains. However, trading in the gray market involves risks and is not regulated.

Success Stories and Risks

  1. Success Stories:
    • IRCTC IPO: Issued at ₹320, it listed at ₹728. Today, it trades at over ₹2,200.
    • Burger King IPO: Issued at ₹60, it listed at ₹138, offering 130% gains.
  2. Risks:
    • Not all IPOs guarantee profits. For instance, Jubilant Food’s IPO initially listed at a loss before becoming highly profitable in the long run.
    • Poorly performing companies may result in losses even if you invest at the IPO stage.

Tips for Investing in IPOs :Free IPO Return Calculator

  1. Research Thoroughly:
    • Don’t invest based on hype. Study the company’s fundamentals.
  2. Avoid Borrowing Money:
    • Only invest what you can afford to lose.
  3. Diversify Your Portfolio:
    • Don’t put all your money into one IPO. Spread your investments across sectors.
  4. Monitor GMP:
    • A strong GMP often indicates good listing gains but proceed cautiously.
  5. Be Patient:
    • Long-term investors often reap better rewards than short-term speculators.

Conclusion [Free IPO Return Calculator]

Investing in IPOs can be a lucrative opportunity if done wisely. By understanding how IPOs work and aligning your strategy with your financial goals, you can make informed decisions. Whether you’re looking for quick gains or long-term growth, thorough research and a disciplined approach are key to success.

Start your IPO journey today, but remember, every investment carries risks. Invest wisely and enjoy the journey toward financial growth!