Initial Public Offering – Answering the most common IPO FAQs

In order for a company to keep running smoothly, businesses need adequate funds. These funds are raised by selling a part of the company to interested investors, which are used for purchasing equipment, hiring employees and expanding the business in general. You can also take out a loan to fund your business. Truly, there are many ways to keep a business running. One such route is known as an Initial Public Offering or IPO. Interested investors can invest in a private company once it goes public through IPO. But what is it and how to invest in IPO?. Find out answers to this and other common FAQs below.

FAQ 1: What is IPO?

An IPO is an investment opportunity through which the general public can purchase a stake in a formerly private company. Businesses use IPOs as a means to raise capital. The business owner lists the company on the primary market and interested investors can apply for the IPO. Shares are allotted on a first-come-first-serve basis.

FAQ 2: How is an IPO launched by a company?

Companies desiring to raise funds from the public through the secondary market are first reviewed by an investment bank, often referred to as an under-writer. The under-writer analyses the financial health of the company and takes stock of its assets and liabilities, after which a strategy to launch the company on the public exchanges is determined. The company then agrees to sell share units to public through the stock exchange and the under-writer sends the signed agreement stating the same to the SEBI. Once a company receives the approval of the SEBI the IPO is launched and opened to the public.

FAQ 3: How to apply for IPO?

The process of investing in IPO is different from purchasing shares from the secondary market. You need to follow a simple, but different procedure in order to apply for the IPO. Let’s say you are interested in investing in XYZ company; a formerly private company that is now going public. You need to read the news reports and be aware of the business in general. You can then approach your broker and apply for the IPO by filling a simple form. If you prefer online trading, you can also apply for the IPO online through your demat account. Once the IPO is launched, you are allotted share units, based on the amount you wish to invest.

FAQ 4: What are the different types of IPO pricings?

Apart from knowing how to invest in IPO, you should also know about IPO pricing which is of two types – fixed price issue and book building.  In the first type, a company offers shares to interested investors at a fixed, pre-determined price whereas in the second type, the price is not determined in advance. Instead, companies determine a price band and investors must indicate the price at which they can buy shares and the number of shares they can purchase.

FAQ 5: What is Sensex and how is it connected to IPO?

Sensitive Index or Sensex, is a term used in reference with the market index consisting of 30 financially stable and reputable companies listed on the Bombay Stock Exchange (BSE). The companies on this index are chosen depending on factors like free-float market capitalisation and represent different companies from various sectors. When you invest in an IPO, and its stock begins to perform well, it may be listed on SENSEX or NIFTY, which represents the market index consisting of 50 financially stable companies. Knowing Nifty and Sensex meaning is important if you wish to invest in stock market.

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