IPOs (Initial Public Offerings) can help purchase company shares and build a strong portfolio. Experienced and institutional investors keep track of upcoming IPOs and do not miss their chance to submit their IPO applications. New and retail investors must also keep track of upcoming IPOs to submit applications timely. They must also be familiar with different IPO terms to make informed decisions. Let us discuss the meaning of IPO and associated terms.
Do You Understand the IPO Process?
Understanding the intricacies of the IPO process is crucial before making ipo investment decisions. This transformative process enables a private company to transition into a publicly traded entity and, in doing so, issue its shares to the general public for the first time. Companies choose to go public for various reasons, including fundraising and debt repayment.
However, a private company cannot initiate this transformation unilaterally; it must obtain authorisation from the Securities and Exchange Board of India (SEBI). To navigate this complex journey, companies often enlist the expertise of underwriters, typically investment banks, who help determine the optimal share price for the IPO.
In India, there are two primary types of IPOs. The first is the fixed-price offering, where the share price is pre-established. The second is the book-building offering, which involves a price band. Investors submit their bids, and the final market price is determined after the IPO concludes.
Throughout the multi-day IPO event, interested investors submit their applications to acquire shares, eagerly awaiting the allotment phase when shares are allocated among them once the IPO concludes. Understanding these key components of the IPO process is essential for investors seeking to make informed investment choices in the dynamic world of public offerings.
Essential IPO Terms in India
Now that you understand the meaning of an initial public offering, here are some essential terms to know:
Draft Red Herring Prospectus
A Draft Red Herring Prospectus (DRHP) is an official document prepared by the IPO issuer. The issuer must submit the DRHP with accurate details to SEBI. It is also available for IPO investors to read and make informed decisions. The document contains details like future strategy, company background, and reason for funding. Investors can review the details mentioned in the DRHP to understand more about the company launching its IPO.
GMP (Grey Market Premium)
Grey market premium IPO is one of the important terms for investors. GMP allows investors to understand the popularity of an IPO before investing. Grey markets are unofficial markets where company shares are traded before the IPO launch. Grey Market Premium is the difference between the unofficial share price and the official share price in the IPO. When the unofficial price is more than the IPO price, it means investors are interested in the upcoming IPO.
Price Band
The price band is usually found in book-building IPOs in India. It includes a lower and an upper price limit. Investors are supposed to place their bids within the price band while submitting IPO applications. Once a book-building IPO closes, the price with maximum bids is the final price.
Over Subscription
Oversubscription in an IPO occurs when the demand for shares from investors exceeds the number of shares available for allocation. In other words, more investors want to buy shares in the IPO than there are shares being offered by the issuing company. When an IPO is oversubscribed, it indicates strong investor interest in the company’s shares.
Under Subscription
When fewer investors are interested in an IPO, the situation of under-subscription arises. There is less demand for the number of shares available in an IPO.
Conclusion
You can grab shares of a public company by investing in its initial public offering. New investors must first know the basics IPO terms like Grey Market Premium (GMP), Draft Red Herring Prospectus (DRHP), price band, book-building, and oversubscription. You can use a trading platform to find upcoming IPOs and build a strong portfolio. Choose an IPO and submit your application now!
