ABC of an IPO

We often see advertisements regarding IPO offer like X Company is coming up with an IPO offer through book building process and the IPO will be open for subscription from 5th august 20010 and will close on 8th august 2010. Have you ever thought what is an IPO and how does it work for a company and an investor? If no then read further. May be after understanding the ABC of IPO you would like to apply for one.

IPO stands for Initial Public Offer. It is a method used by a company to raise funds from the investors for the future growth of the company. Through an IPO a company gets listed to the stock exchange. In very simple words we can say an IPO is selling the company’s shares to the public first time in the primary market.

Primary market:

A primary market is a market where the shares are offered or sold to the investors directly by the company to raise money.

Secondary market:

A secondary market is a market where the shares are traded when they get listed to stock exchange after the initial public offer to investors in the primary market. The secondary market can be equity market or a debt market.

In secondary market you buy or sell shares that are listed while primary market provides a platform to the companies to enter the secondary market.

An IPO is good for both, an investor as well as the company who comes with the issue/offer.

For an investor:

An IPO gives a chance to an investor to buy shares directly from the company at a special price or price of their choice (in book building IPOs). There can be a big difference between the price at which an investor wants to buy the share and the price the company or the issuer decides to for its share. This difference can lead to a good listing gain for the shares allocated to the investor. After analysing the fundamentals and future prospects of the company one can take advantage of an IPO as it is different from everyday’s trading.

For the issuer:

IPO helps the company in fund raising for their future projects, growth, and also to pay their previous borrowings. By listing in the stock exchange the company can identify the value of its share that a million investors decide.

An IPO can be made through fixed price method, book building method or a combination of both.

  • In fixed price method the price is known in advance to investors at which the issue is offered or allocated while in case of book building process the actual price is not known to investors but the price band/range is known.
  • In fixed price you don’t know the demand of the issue until the closure of the IPO but in the second case the demand status is known everyday as the book is built during the IPO.
  • If payment has made at the time of subscription you get refund after allocation in fixed price process while in book building method you pay after the allocation of shares.



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