IPO (Initial public offering)

An IPO (Initial public offering), is the initial sale of a company's stock to the public. Prior to the IPO, the company's stock is privately held and cannot be sold to the public. Startup companies may go public to raise money to develop and grow their business. Other companies may go public to expand existing products or services.

There are some other advantages to going public. Companies can raise capital without increasing debt and allow existing shareholders to profit from company growth by liquidating their shares.  But on the flip side, public companies have increased reporting requirement and additional marketing, accounting and legal costs.

So how exactly the company can go public:

First, a company hires a lead manager. The lead manager starts with documenting the information about the company and its proposed public issue. It develops a document called Draft Prospectus under SEBI guidelines. SEBI is the capital market regulator in India.

The lead manager now submits the Draft Prospectus to the SEBI for review. Once approved, the lead manager goes to the exchanges (i.e. BSE and NSE) where they intend to list company shares. The bidding for IPO shares starts based on the agreed date with exchanges. The shares are now allocated to investors based on the criteria identified for each kind of investor i.e. Retail, Institutional, HNI etc.

Once the IPO is complete, share starts trading on the stock exchange.

It's here that the stock price is determined by market forces. Often there is a great deal of excitement driving buying and selling.

It's important to realize that the risk of an IPO varies based on the company going public. Some companies have a long history of earnings growth prior to going public, while others might be going public to generate money to pay their bills.

The other risk of IPO's including the lack of previous trading history, limited company information and initial price volatility. And the risk of loss is substantial. But with the risk of loss comes the potential for profit as well. And this potential is one reason many traders pay so much attention to IPO's.

Answered on 2018-12-03