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How to invest in an IPO?

A Company which has decided ‘going public’ will float the shares of capital stock to the pool of investors. When they buy shares it pours in liquidity to the Company. The Company utilizes them to clear off debts, expand and improve their business or use it as a working capital. Investing in IPOs involves a lot of risk and also has the potential to give very high returns among other assets in the portfolio.

Who can invest?

Not all IPOs are open to general public. The underwriters decide the category of people whom they want to invest in their Company. So, there are three kinds of applicants,

Retail Individual Investor (RII) – if you are an investor who applies for small value of shares

Non-Qualified Institutional Investor (NII) – if you are an investor who applies for large value of shares and you do not qualify as Qualified Institutional Buyer category. They include Companies, NRIs, Corporate entities, Trusts, and Societies. 

Qualified Institutional Buyer (QIB)– the investor who bids for securities is a financial institution which is declared as companies in the section 4A of the Companies Act or a foreign institutional investor who is registered with SEBI.

How to invest?

For a greenhorn investor, investing in an IPO may seem complicated. Fret not; you can do it by following a few simple steps to start investing in the stock market.

So there are two ways in which you can apply for an IPO,

Offline

  1. You need to have a demat account; a trading account isn’t necessary unless you plan to sell the shares you were allotted through IPO.

  2. Bring an application form from the next-door broker. Fill in the details.

  3. Write a cheque amounting to the number of shares you plan to apply for. If the amount crosses 50000 rupees, you should also attach a PAN card copy with the application form.

  4. Handover the application form, cheque and the PAN card copy (if necessary) to the Broker. Collect the acknowledgment form from them.

Online

  • To start investing in an IPO, you need to open demat cum trading account. A linked bank account and a PAN card are sufficient open them.  

  • Once, the account is up, login to your trading account, select the IPO which you would like to invest in.

  • Transfer the amount from your banking account to your trading account.

  • Select the number of IPOs you would like to buy and also the bid price (or you can just select the cut-off price)

  • If the shares are allotted, the shares will be credited into your demat account. The refund if applicable will either be mailed to your postal address or it will be transferred to your bank account through ECS.

Caution to be exercised

You should be vigilant and aware of the risks involved when investing in IPOs. Have these points on the top of your mind, before you consider an IPO investment.

  • Your objectives of investing and the financial status should meet a certain the eligibility criteria. Not all IPOs are suitable for everyone.

  • Make sure you read the draft red herring prospectus. Know how your funds are planned to get utilized. Company’s growth path, the fundamentals and objectives of the Company should give you a fair idea on what return you can expect on the investment.

  • Do not fall for the endorsement and marketing rumours of the broking firms and other institutions. Stick to facts.

  • Inspect the promoter’s background. If it involves Government securities and the established public institutions then that will partly add a safety element to your investment. Match this to your risk tolerance and financial situation. If you think the investment is viable, go for it.

Buying an IPO should be a well thought out decision. It is much easier and convenient to apply for an IPO online. But once the payment is made, you cannot stop. If you are too doubtful on the decision, you may want to opt for an offline investment where you can stop the payment of cheque. An IPO investment can make money or lose money for you. So think before you invest.  

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