What is an IPO? A Complete Beginner’s Guide to IPO Investment
In the stock market, the term IPO is heard very frequently. It appears on financial news channels, social media, WhatsApp groups, and discussions among investors. Whenever a well-known company announces an IPO, excitement spreads everywhere.
But the real questions are:
- What exactly is an IPO?
- How does it work?
- Is investing in an IPO always profitable?
Many beginners invest in IPOs without fully understanding the concept, which sometimes leads to disappointment. This guide explains IPOs from scratch in very simple language, with examples and tips so that even a complete beginner can understand clearly.
What is an IPO?
IPO stands for Initial Public Offer:
- Initial – First time
- Public – Offered to the general public
- Offer – Selling shares
When a private company offers its shares to the general public for the first time, it is called an IPO. In simple words, an IPO is the process through which a private company becomes a public company and gets listed on a stock exchange like NSE or BSE. Once listed, anyone can buy or sell the company’s shares.
For example, when a new fintech startup decides to raise capital to expand nationwide, it may issue an IPO. This allows investors like you to buy shares in the company from day one.
Why Do Companies Launch an IPO?
Companies raise money through IPOs for various reasons. Consider Chandu, who runs a small grocery business. After expansion to multiple cities, he needs capital for bigger stores, advanced technology, and marketing.
Option 1: Bank Loan
- High interest rates (10–12% or more)
- Interest must be paid even if business losses occur
- Increases financial pressure
Option 2: IPO
- Money raised from the public
- Investors become shareholders
- No fixed interest burden
Many companies prefer IPOs because the capital raised can be used for expansion, debt repayment, research & development, or marketing campaigns without the burden of paying interest.
What Happens When You Invest in an IPO?
- Shareholder: You become a part-owner of the company.
- Capital Gains: Profit if the share price rises in the stock market.
- Dividends: Share of company profits, if declared.
- Voting Rights: Vote on important company decisions.
Why IPOs Matter for Investors
Investing in IPOs allows you to participate in the growth of a company from the start. Here’s why they are attractive:
- Potential for high listing gains if the IPO opens at a lower price than the market value.
- Opportunity to buy shares of a growing company early.
- Diversification of portfolio by adding new companies and sectors.
However, IPOs also come with risks. The stock may fall below the issue price, and short-term volatility can be high. Hence, understanding the business and doing research is crucial.
Types of IPOs in India
IPOs in India can be categorized into three types:
- Mainboard IPO: Large, established companies listed on NSE & BSE. Less risky but moderate growth potential.
- SME IPO: Small and medium companies. Higher risk but also higher potential returns. Suitable for aggressive investors.
- OFS (Offer for Sale): Existing shareholders (promoters) sell their shares. The company does not receive fresh capital.
Real-Life Examples of IPOs in India
Zomato IPO (2021)
Zomato, a food delivery platform, launched its IPO at ₹76 per share. On the listing day, shares opened at ₹116 and closed at ₹112, giving investors a huge listing gain of ~47%.
Lesson: Popular companies with high investor sentiment can give excellent initial returns, but long-term performance depends on business fundamentals.
Paytm IPO (2021)
Paytm, a digital payments platform, issued shares at ₹2,150. On listing, the stock opened at ₹1,867 and fell further to ₹1,100 in months. Early investors faced losses.
Lesson: Even well-known companies can underperform if overvalued at IPO.
Nykaa IPO (2021)
Nykaa, an e-commerce beauty and wellness company, issued shares at ₹1,125. The listing day gain was ~89%, showing how niche companies with strong branding can perform exceptionally well.
Pros and Cons of Investing in an IPO
| Pros | Cons |
|---|---|
| Potential high listing gains | High volatility in initial days |
| Chance to invest in a growing company early | No guaranteed returns |
| Dividend income if declared | Shares may underperform in long term |
IPO Step-by-Step Roadmap
1. IPO Announcement
Company announces IPO with issue price, dates, and number of shares.
2. Application Period
Investors apply online via net banking or broker app using ASBA/UPI.
3. Subscription
Company receives applications; oversubscription may occur if demand exceeds supply.
4. Allotment
Shares allotted based on lottery (if oversubscribed) or fully allotted if undersubscribed.
5. Refund
Unallotted application money is refunded to investors’ bank accounts.
6. Listing
Shares get listed on NSE/BSE, and investors can trade in the secondary market.
How to Apply for an IPO in India
Method 1: Through Net Banking (ASBA)
- Login to net banking
- Go to IPO / ASBA section
- Select IPO
- Enter quantity & price
- Submit using UPI
Method 2: Through Broker App
Apps like Zerodha, Groww, Angel One, Upstox:
- Open the app
- Go to IPO section
- Enter bid details
- Approve UPI request
Does IPO Always Give Profit?
- Some give high listing gains
- Some perform well long-term
- Some fall below issue price
Things to Check Before Investing in an IPO
- Business model: Is it scalable and profitable?
- Company financials: Revenue, profit, cash flow
- Debt level: Avoid over-leveraged companies
- Valuation: Compare with peers and industry
- Purpose of IPO: Expansion, debt repayment, or other uses
- GMP (Grey Market Premium): Gives market sentiment but not a guaranteed price
IPO vs Fixed Deposit
| Feature | IPO | FD |
|---|---|---|
| Risk | High | Low |
| Returns | Not Guaranteed | Fixed |
| Ownership | Yes | No |
Common IPO Mistakes
- Following tips blindly without research
- Expecting guaranteed listing gains
- Not reading the IPO prospectus
- Investing all savings in one IPO
FAQs
- Q: Can I apply for multiple IPOs at once?
A: Yes, but each IPO has its own rules and limits. - Q: Do I need a Demat account for IPO investment?
A: Yes, a Demat account is mandatory. - Q: Is IPO investment safe?
A: IPOs are risky and require research; profits are not guaranteed. - Q: What is oversubscription?
A: When demand exceeds available shares, allotment is done via lottery.
Conclusion
An IPO is a great opportunity to participate in a company’s growth, but it is not easy money. Success requires research, patience, and discipline.
- IPOs can create wealth
- IPOs can also cause losses
- Invest only what you can afford to lose