What Is an IPO?
An initial public offering (IPO) is when a private company sells shares to the public for the first time and lists on a stock exchange. Here's how it works and how to judge one.
Why companies go public
- Raise money to grow, invest or pay down debt
- Let founders, employees and early investors sell some shares
- Gain visibility and credibility
- Use listed shares to make acquisitions
How an IPO works
- 1The company hires investment banks (underwriters) to manage the offering.
- 2It files a detailed prospectus with the market regulator describing the business, finances and risks.
- 3The bankers market the shares to investors and set a price range.
- 4Investors apply for shares; the final price is fixed based on demand.
- 5Shares are allotted and the stock starts trading on the exchange on listing day.
How to apply
In India, retail investors usually apply through their broker or bank using UPI or ASBA during the subscription window. If demand is high, shares are allotted by lottery.
In the US, IPO shares mostly go to institutions; retail investors typically buy once the stock starts trading, though some brokers offer limited IPO access.
Risks of buying IPOs
- Short public track record to judge the business
- Prices can swing sharply in the first weeks of trading
- Hype can push the price well above fair value
- Lock-up expiry: when insiders are allowed to sell, extra supply can weigh on the price
IPO evaluation checklist
- Read the prospectus: what does the company do and how does it make money?
- Is revenue growing, and is the business profitable or close to it?
- How is the IPO money being used: growth, or existing owners cashing out?
- How does the valuation compare with listed peers?
- Who are the promoters or founders, and how much are they keeping?
Educational information only, not investment advice. Market data may be delayed.
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