What is Initial Public Offering (IPO) & How To Apply?

We all have often heard phrases like 'X is going for IPO' 'Y's IPO is hugely successful' 'Let's apply for Z company's IPO' but what exactly does it mean? What is an IPO and how can you apply for a company's IPO? Let's understand this better in this blog.

What is an IPO?

IPO stands for Initial Public Offering. It is a process in which a private company sells shares to the public for the first time to raise money. It helps the promoters and the private investors because it gives them greater liquidity and, in most cases, premiums on the initial investments. It is also great for the public because it allows them to invest in the company, otherwise not possible.

Once the company goes public, its stocks get listed on the stock exchange and traded like every other stock. Since the company is selling shares to the public in this kind of fundraising, it is not obliged to return the money raised.

In simpler terms:

Let us try to understand the process in the simplest way possible. Let us suppose there is a company with 100 shares, and a promoter owns all the shares. Let us say the company wants to raise Rs. 5000/-. Based on the company's financials, the advocate believes that each share of the company is worth at least Rs. 500/-. So, to raise Rs. 5000 they will have to sell ten shares of the company (10*500 = 5000). So now, the promoter will launch an IPO of 10 shares, each valued at Rs. 500/-. If the public believes that the champion has a good business and the share is worth Rs. 500 and in the future, it could be worth way more than it is right now, then they may buy the shares.

The actual world scenario is not as simple as the above explanation, but we hope you understand the concept.

Also read: How To Get Started With Investing Money

How to Apply?

The first thing you will need to apply for an IPO is a Demat account. You can open a Demat account with any broker of your choice, like ICICI direct or Zerodha. A few things will be asked when you are applying for the IPO, like bid price, lots, etc. If you wish to get an allotment, then prefer filling in the upper limit of the price band as your bidding price. Always enter the number of stocks you want to buy in multiples of the lot size. For example, if a company is doing an IPO and the lot size is 15, you can buy 15, 30, 90, or any multiple of 15 shares.

Increase Chances of Getting Allotment

If an IPO is oversubscribed, then the people who get the allotment are decided through a lottery system and are purely luck-based. Here are two simple things that you can do to increase your chances of getting an IPO allotment.

  1. Highest Bid - If you want the allotment and are willing to pay a higher price for it, always enter the upper limit of the price range as your bidding price. The difference is not that huge, but you will only be eligible for the lottery if you are one of the highest bidders.
  2. Apply Through Multiple Accounts - Since the final decision is made through a lottery system and random accounts are chosen, it is best to apply from many reports. If, let's suppose, you wish to buy five lots, then instead of buying them all from a single Demat account, try applying from multiple Demat accounts. It will increase the likelihood of one of them getting picked in the lottery.

Also read: Short-Term vs Long-Term Investments: How to Decide?

Upcoming IPOs

Some famous companies that are planning to launch an IPO in the coming year are:

  • LIC
  • NYKAA
  • Bajaj Energy
  • Go First
  • Penna Cements

(Check out 'Learn & Grow with Wizely' 'to read and learn all about personal finance and financial planning.)

Sakshi Mehrotra

Sakshi Mehrotra