IPO is a common term used in the stock markets. The IPO is the first offering of the stocks of a private company to the public. The company launches an IPO to raise capital to fund its operations by offering their investors a percentage of the company’s profits through shares. An IPO is an easy way for a company to raise capital compared to depending on venture capitalists and private investors.
An IPO is first traded in the primary market before investors are allowed to trade the new shares in the secondary market. After this, traders can trade the new stock in the secondary market on a daily basis. The company issuing the IPO can only issue to the limit that has been specified in its articles.
The IPO process is also referred to as ‘a company going public’.
Here are Some Reasons That can Compel an Investor to Choose IPO Investments:
- It provides access to unlisted stocks that have big earning potential. Merchant bankers and issuers fix the price of the IPO in an attempt to attract more funds. Shares floated through an IPO are also available in the secondary market, but may get costly in case the company becomes successful.
- An IPO is also an excellent way to acquire shares of public sector undertakings (PSUs). By the time the stock is listed in the secondary market, the shares would become overpriced. Hence, buying them during an IPO is a better alternative.
- The Securities and Exchange Board of India (SEBI), in recent years, has introduced reforms in public offerings like a higher quota and lower price than institutional traders, among many others, that favor retail investors. These benefits are not available when investing in the secondary markets.
- SEBI has also imposed stringent norms demanding higher transparency and disclosure, which makes the IPO market more reliable for investors.
- IPOs offer the same information to all investors, which is basically the prospectus of the company. However, in the secondary market, not all investors are aware of the market analysis, so an IPO investment is a better choice.
- In an IPO investment, the investor’s account is debited only after the shares have been allotted. Hence, his/her funds are safe and they do not lose interest. So, it an economical choice for small-time investors.
Companies that typically introduce IPOs are not yet established or sometimes do not record steady growth. The company’s growth prospectus is the only available document on which investors can base their investments.
Nevertheless, an IPO gives investors a chance to invest in companies that have the potential to become market leaders. With stringent regulations and increased transparency, the IPO market has become more inviting to retail investors.