An IPO or Initial Public Offering involves issue of shares of a private company to the general public for the first time on the primary market. The interested investors can invest in the IPO of their desired company.
If you want to know about the basics of IPO, its types, reasons why companies go for IPOs, benefits for the investors who invest in an IPO, and how an IPO works, do read this article: IPO: What is an Initial Public Offering?
In this article we will go through the process an investor needs to follow to invest in an IPO and also the prerequisites required for investing in an IPO.
Let’s understand how to invest in an IPO
Requirements to invest in an IPO:
For investing in an IPO and also for trading the shares in the secondary market, you require the following prerequisites:
- Demat Account: A demat account for holding the securities in electronic form.
- Bank account: A bank account linked to your mobile number to make payment for the number of shares you have subscribed.
- Trading Account: A trading account for trading (buying and selling) the shares in the secondary market.
- UPI ID: UPI or Unified Payment Interface allows instant payments. It is an address that uniquely identifies a person’s bank account. UPI ID is usually in the format: [email protected] or [email protected]
From July 1st, 2019, SEBI has made it mandatory for all retail investors to use the UPI mechanism to apply in any IPO.
Before investing in an IPO investors should do a thorough research on the following areas:
- Investor’s financial position: The investors must analyze their financial objectives as well as risk appetite before investing in an IPO. Investing in an IPO does provide gains to investors but the investors should select the IPO of the company which matches the level of profits they are expecting and also the risks they are ready to bear.
- Company’s past financial performance, if any: A well established private company can even decide to go public through an IPO. In such cases, investors have a golden opportunity to analyze the past performance of the company. This way investors can make appropriate investment decisions to invest in the companies which match their level of expectations.
- Future Prospects: In businesses what matters the most is where will the company reach in the next few years. Therefore it is very important to analyze what are the company’s future projects and expectations.
- Red Herring Prospectus: It refers to the first document which a company issues before going public through its IPO. It provides details such as past performance and future prospects of the company, number of shares issued, price per share etc. The investors must go through the prospectus thoroughly before investing in the IPO of the company.
- Promoter’s background: Promoters are the people who market the IPOs to the potential investors. There is a famous phrase “First impression is the last impression”. The promoters create the first impression about the company in front of potential investors. Therefore, a company should have a well skilled and experienced group of promoters. Well, the company does its part of having excellent promoters. In the same way the investors should also check the promoter’s background as well as how well they can manage the company’s future prospects.
- Type of business: Before investing in an IPO, the investors should understand the type of business of the company. They should research about the performance of companies in the same business line and also the potential of the business line in future.
Process to apply in an IPO via UPI
As mentioned above, UPI or Unified Payment Interface allows making instant payments. To apply for an IPO through an online platform via UPI, following steps should be followed:
- To start with, first login to your trading account.
- Next, select the IPO in which you want to invest.
- Then, enter your UPI ID and the investor type.
- Next, enter the quantity of shares you want to apply for and the price you want to pay for the shares.
- Next, accept the mandate request on the UPI application. The mandate request is sent to authorize blocking of funds equal to the application amount.
- After accepting the mandate request the amount for IPO will be blocked on your account. And then your IPO application will be submitted.
- At the time of IPO allotment, if the investor has been allotted all the shares he had applied for, the entire amount of application is debited from his account. If there is partial allotment of shares, the amount for which shares have been allotted is debited from the investor’s account and the remaining is unblocked. Alternatively, if no shares are allotted then the whole amount is unblocked.
Note: You can also apply for the IPO through your demat account.
So, now you must have got a basic understanding of the process for investing in an IPO. I hope this article was helpful to improve your knowledge about the same. Though IPOs are a gainful opportunity for investors, one must remember to do thorough research about the company before investing. Also, make sure to find companies which match the level of your expected profits and your risk appetite.