A company hires an investment bank to manage an IPO before going public. That investment bank and company will determine the financial details of the IPO in the underwriting agreement. Then, along with the underwriting agreement, they file a registration statement with the SEC. The SEC examines the information disclosed, and if found to be correct, it allows a date for the announcement of the IPO.
What is an IPO?
IPO stands for Initial Public Offering. It is the process by which a privately held company becomes a publicly traded company by offering shares to the public for the first time. A private company with a few shareholders shares ownership by trading its shares in the market. A company’s name is listed on a stock exchange through an IPO.
Why Do Companies Go Public or Announce an IPO?
You may be confused as to why private companies publicize their shares. Here are some reasons why companies go IPO.
- For public awareness
IPOs are announced on a number of channels, including the stock market window on trading platforms. Apart from that, such increased exposure not only increases the company’s awareness but also garners the interest of many investors. Therefore, especially before the IPO day, the company gets a lot of publicity.
- Exit strategy
Another key reason why many companies launch an IPO is to pay back capital owed to investors and venture capitalists. Once a company issues an IPO, the stock goes up, during which venture capitalists and investors get an opportunity to get their returns. As a result, they have to sell their stocks in the company and leave the board.
- To raise capital
Generally, one of the main reasons why companies launch an IPO is to raise capital. In many cases, the company may decide to expand or open franchises and expand its geographic influence. Besides, it incurs increased costs in operations. In some cases, the company may also have existing debts that they want to settle. In such times, an IPO can raise a lot of capital which helps the company to dispute its debts.
What to look for before buying IPOs?
- Background checks
The company doesn’t have enough historical data to support your decision because it’s just becoming popular. A red herring is a data on IPO details provided in the prospectus, which you should look into. Know about the fund management team and their plans for utilization of the funds generated by the IPO.
- Who is underwriting?
The underwriting process increases investments by issuing new securities. Realize that small investment banks are underwriting. They may be willing to underwrite any company. Generally, an IPO that has the potential to succeed is backed by large brokerages that can underwrite a new issue well.
- Lock-up periods
Often after an IPO goes public it tends to go down. The reason for this share price fall is the lock-up period. A lock-up period is a contractual caveat during which a company’s executives and investors may not sell their shares. After the lock-up period ends, the share price will experience a reduction in its value.
One of the most commonly asked questions is how to buy IPO shares. Here’s how to buy an IPO share: Through ASBA and UPI. But first, it is important to know that you need these 3 accounts to buy IPO shares.
Demat account: Having a Demat account is a must for investing in an IPO share offered by a company, as it stores your shares in an electronic form.
Trading Account: You can open your trading account online with any brokerage by following a few simple steps. This account allows you to buy IPO shares online.
Bank account: Finally, to make the necessary payment for the IPO shares you need, you need a bank account to facilitate the payment. After confirming that you have a bank account, you can pay for the IPO shares through UPI or ASBA (Application Supported by Blocked Amounts).
Final Words
If you buy an IPO for a company, you are exposed to the fortunes of that company. You have a direct influence on its success and loss. Besides that, this asset of your portfolio has the highest potential to provide returns. On the other hand, it can sink your investment without a hint.
In addition, remember that stocks are subject to market volatility. You should know that a company offering its shares to public investors is not liable to repay the capital. Before investing in an IPO, you should weigh your potential risks and rewards.
