How to be Clever while Investing in IPO’s
Nowadays IPO’s are much in trend in the share market. You may hear about a new Initial Public Offer (IPO) every week. It is the time when a company lists its shares for trading for the first time.
The stocks are available in the secondary market, the regular market where much of daily buying and selling happens.
What is an IPO?
No, definitely I am not here to tell you just the full form. You might have read about it many times. It is a process that private companies follow.
A private company goes public by issuing the shares to the general public. The main motive of the IPO is to raise money. By selling the share in an open market, the company can collect money and grow the business successfully.
What to keep in mind before applying for the IPO?
Here you will find the essential things that you should keep in mind before going:
Study About the Company
You should study everything about the company which you are looking to invest in. Go with the prospectus, study the goals of the company, and how the company will invest it.
Stay to Current Market Trends
IPOs are closely linked to the market, IPO’s become more potent when the current market trend is followed. Thus, investing the money in an IPO where the trend is higher is a successful way to accumulate wealth.
Volume of Application
IPO is known to be a reliable investment option, and hence oversubscription is bound to happen. The more entering means fewer shares will be allotted to your part. So, keep an eye.
Here are some of the practical tips that should be kept in mind while investing in IPOs:
- IPO Allotment Process
Before we talk about how you can invest successfully in IPOs, you need to learn about how the process works. In the secondary market, you have to bid for the shares. Every IPO offers shares in lots. You have to bid for a lot of these shares, you can apply for multiple lots. The bidding amount falls within a certain range. The higher amount you bid the greater are your chances of getting allotted shares. The company takes into account all the bids by the investors and then allots shares.
- Allotment Depends on the Demand
The price of your bid is not the only thing that decides whether you get shares or not. It demands on demand of the share. This process is called ‘oversubscription’. This process becomes a bit complicated. For example: Suppose you have only 100 shares and the subscription is 200 shares, everyone gets the lower share, even some may not get shares.
- Unsubscribed Shares at the time of Allotment
A company’s IPO has to subscribe to 90%, according to the Securities and Exchange Board of India. If the company fails to do so, then the company will not be listed on the Stock Exchange. Underwriters usually buy the remaining share, these are financial institutions and intermediaries. They usually pay a commission at the start of it, process in exchange for the promise to buy the rest of the share.
- Special Allotment
Allotment depends on the various categories in which you’re investing in. If you invest through the Qualified Institutional Buyer (QIBs) category. Every investor is allotted shares proportionally. The complication mostly happens when you invest as a retail investor. You are not allotted shares proportionally, especially when the IPO is oversubscribed. The main reason is the company allots a certain amount for retail investors. This is the maximum amount of shares that can be distributed to the investors.
- Retail Investors Allotted Shares
Sometimes allotment becomes complicated when oversubscription happens. Firstly, the company totals all the bids and amounts. Further, the amount is divided by the value of the lot. This will give the number of retail investors who will be allotted shares.
- How to get Alotted Shares Successfully?
Try to determine the popularity of the IPO, if the company will oversubscribe the share. You can bid on the higher range, you can try to bid for the larger amount, not just the minimum amount. This increases the chances of the share allotment.
Therefore, the investors cannot get allotted shares less than a minimal lot.
Hence, it is beneficial to bid for a larger amount. The IPO is oversubscribed by a small amount then all retail investors get allotted the minimum amount.
See also :
- Mutual Funds with 4 types of Associated Risks – Must Know before Investment
- Active and Passive Investing: An Overview 2021
- Avoid 8 Mistakes While Planning for Retirement Plan
Final Thoughts!
Once companies make the decision to bring an IPO, the future seems to be unclear until the offering is completed. IPO’s are risky; they are not always beneficial. So, you have to be clear about investing your money.
