What are the different types of IPO

An IPO or Initial Public Offering is when a private company goes public and makes its shares available for the public for the first time. Additionally, after an IPO a company that was earlier privately owned becomes a publicly traded company. Before a company starts an IPO, the number of shareholders is very low and it includes venture capitalists, founders, and angel investors. Moreover, while an IPO is going on at that time the shares are open for sale to the public and you can buy the shares directly from the original company. Once you buy shares of any company you become the shareholders and you get the rights and benefits attached to the tag.

How are shares allocated in an IPO?

There are various types of investors when it comes to IPOs. These investors include:

Retail Individual Investors (RIIs)

Non-Institutional Investors (NIIs)

Qualified Institutional Buyers (QIBs)

The allocation of shares differs in all of the above groups of investors in an IPO. If you are an individual investor, you come last in the categories.

As an individual investor, you can invest lots worth Rs.10,000-Rs.15,000. The maximum amount for which you can apply in an IPO is Rs.2 lakhs. The total demand of shares of that company is judged by the applications received prior to the IPO. If the demand for the shares is less or equal to the number of shares in the retail category then there is a huge chance you are offered a full allotment of shares.

In the case mentioned above, the shares in the retail category are offered to investors via a lottery system. It is a computerized process that ensures impartial allocation of shares to the investors.

You can see the list of Upcoming Ipo easily on Ticker by Finology.

Types of IPO

There are two most common types of IPO. They are:

Fixed Price Offering: This type of IPO is referred to as the issue price which is set by the companies at the time of initial sale of shares. The investors come to know about the price of the shares and accordingly invests. The demand for the share from the market is out only when the issue is closed. An investor has to pay the whole share price when he/she is applying for the IPO. The price per issue is fixed after an evaluation of the company’s financial aspect. The price of the shares is shown on the printed order document which also elaborates various factors affecting it.

Book Building Offering: The company offers only a 20% price on shares to the investors under the book building issue. Investors bid in a great manner before the final price settlement takes place. Investors have to declare the number of shares they are willing to buy and at what price. There is no fixed price, unlike the Fixed price offering. Here the lowest and highest share prices are taken into consideration. It totally depends on the bids of investors and the final price is set when the bidding process comes to an end.

Fixed Price vs. Book building issues: Investors have to pay 100% price of the shares in the fixed price issues application. On the other hand in book building offering, QIBs just have to pay 10% payment in advance. While other investors have to pay 100% advance along with the application.

In the case of a fixed price issue, about 50% of shares are reserved or booked for applicators above Rs.1 lakh and the other 50% for below Rs.1 lakh. The bifurcation of reserved shares is different in the book-building process. In the book-building process, the company keeps 50% of shares reserved for QIBs, and 35% of shares are reserved for small investors. The balance of shares is reserved for the rest of the investors.

The companies float between these two types or have a mix of both. IPO is a wonderful source for raising capital for any business-related expansionary activity. Investing in IPO is quite risky due to the lack of information available about the new entrants. For successful investment in an IPO, it is essential to monitor the upcoming offerings.

What are some benefits of investing in an IPO?

Meet long-term goals: IPO investments are a type of equity investment. So, they bring the opportunity to earn big returns in a long period. Additionally, the funds you earn here can be utilized to fulfil long-term goals like buying a house or retirement.

Get going early: Investing in an IPO can help you enter the ground floor or ground level of the company that has a higher potential for growth. Moreover, an IPO is typically a window that will bring you rapid profit in a short period. It will help you grow your wealth in the long run for financial goals.

Buy at a cheaper rate and earn a bigger amount: The IPO Price is the price where you can get the share of the company at the cheapest price. When you invest in a small company it has the potential of growing big and the price can increase drastically. You buy cheap and earn big which is an opportunity which should not be missed.

Price transparency: The price per share issued is mentioned in the IPO order document. So you have the access to the same info that is also available to bigger investors. This changes after IPO as post-IPO the prices depends on dynamic market rates. Initially, price transparency is a great advantage to start your IPO journey.

Conclusion

In conclusion, An IPO or Initial Public Offering is when a private company goes public and makes its shares available for the public for the first time. Additionally, after an IPO a company that was earlier privately owned becomes a publicly traded company. There are two most common types of IPO. They are Fixed price and book building issues. There are many benefits of investing in IPO like Price transparency, early opportunity, buy cheap and earn big etc. Investing in IPO is a risky but great opportunity which you should not miss if have appropriate funds for the same.