What is IPO? [Definition and Advantages]

Initial Public Offering or IPO is when a privately-held company goes public with a new stock issuance. But what is IPO in the broader prospects? What are the advantages, and how to buy them? Let us know each of these with detailed descriptions.

What is an IPO?

IPO or Initial Public Offering allows a privately-held company to go public and sell its shares to other investors. When a handful of shareholders want to increase their business, they sell a part of their shares to the public through an IPO.

The company can use the money they get in return for the shares for several reasons; these include business expansion, improving infrastructure, repaying loans, or using it as a capital investment. A part of ownership is sold to the public, and they get profits or losses in return. To apply for an IPO as a company, you need to tie up with an investment bank and apply to SEC for further proceedings.

Once the company gets approval from SEC after a thorough scrutinizing of the financial books, it is listed on the stock chart. It is made available to the public through multiple channels such as Newspapers or electronic media. However, you will need a Demat account to buy these shares publicly.

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How a Company applies for an IPO?

For a company to apply for an IPO. There are two major steps –

  1. Tie up with an investment bank that will handle all the transactions.
  2. SEC (US) / SEBI (India) examines all the company for irregularities and pass IPO if all the requirements are met and the company is efficient.

Most of the major banks, such as HDFC, support these investments and trading through their online portal. Once the security board finds the information to be accurate and valuable, the dates for IPO are released, and public investors will be able to buy the shares readily through multiple broker services.

Also read: What is an Escrow Account? [The General Description]

What are the Advantages?

Companies offer their shares to the public for multiple reasons. These can be used to raise capital investments, infrastructure developments, loan repayments, business expansion, or other money-related reasons.

Here is the list of advantages,

  • Companies need investments to run, pay for their employees, manufacture products, or bring more business. IPO enables companies to collect sufficient money for these reasons.
  • IPO practices increase the liquidity in a company.
  • If you are not happy being one of the stakeholders and not gaining enough financial returns, an IPO is one opportunity to exit the company.
  • Once the company goes public, it increases the company’s credibility and publicity, Indirectly leading to more market recognition.
  • Rising capital investment can be reduced once the company goes public. Investments from public investors help raise capital with reduced effort.
  • Stocks are a great mode of payment when there is heavy due to loans. If the company cannot repay the money due to financial losses, it can trade a part of its ownership by selling shares to them through an IPO.

How to Buy IPO Shares?

To buy a company’s public shares through IPO, you can use a Demat account and look for the listing. Once you have figured out the best-suited type of investment, you can then place your order and buy the share. The type of funding/investment you are about to make in this company holds great importance if it is a fixed-price or book-building IPO. In such a case, you can also opt for a loan from the bank or NBFC.

If you plan to buy the IPO shares through an agent or broker, you can pay using the UPI gateways. However, you can easily do this independently using the Demat account.

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Frequently Asked Questions [FAQs]

What is IPO in simple terms?

Initial Public Offering is the process during which a privately-held company goes public in a new stock issuance.

How do I buy these shares?

You can buy these shares through an agent/broker or using a Demat account (independently)

Should One buy IPO or not?

Initial Public Offerings are good, but one needs to analyze the stocks instead of blindly investing because of the market buzz.

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