IPO Basics (Initial Public Offering)

You often hear news like "Zomato IPO subscribed 30 times!" or "LIC IPO opens tomorrow." What exactly is happening?

IPO (Initial Public Offering) is when a private company sells its shares to the public for the first time. It is the transition from "Private Limited" to "Public Limited."

Why Do Companies Launch IPOs?

Mainly to raise money (Capital) for:

1. Expansion: Building new factories, opening new stores.
2. Debt Repayment: Paying off bank loans to become debt-free.
3. Exit for Early Investors: Founders or VCs (Venture Capitalists) want to sell their stake and book profits.

How an IPO Works

1. Company Hires Bankers: They decide the price and valuation.
2. DRHP Filing: They file a document (Red Herring Prospectus) with SEBI giving all details.
3. Price Band: They announce a range (e.g., ₹100 - ₹105 per share).
4. Bidding Open: Public applies for shares (usually open for 3 days).
5. Allotment: Lottery system decides who gets shares (if demand > supply).
6. Listing: Shares start trading on Stock Exchange (NSE/BSE).

Key Terms You Must Know

1. Lot Size

You cannot buy 1 share in an IPO. You buy a "Lot."

• Example: Price ₹100. Lot Size = 150 shares.
• Minimum Investment = 150 × ₹100 = ₹15,000.
• Usually, minimum investment is ~₹14,000 - ₹15,000.

2. Oversubscription

When demand is higher than supply.

• "Subscribed 10x" means for every 1 share available, 10 people want it.
• Retail Portion: Reserved for small investors (like you).

3. Listing Gains

The profit you make on Day 1.

• IPO Price: ₹100.
• Listing Price: ₹150.
• Listing Gain: 50%.
• People love IPOs for this "quick money."

4. Grey Market Premium (GMP)

The unofficial price people are willing to pay before listing.

• High GMP = High chance of listing gains.
• Negative GMP = High chance of loss.

Should You Invest in IPOs?

The Good

• Chance to buy good companies early.
• Potential for massive listing gains (some IPOs double on day 1).

The Bad

• Lottery System: In good IPOs, getting allotment is pure luck. You might apply for 10 IPOs and get 0.
• Overvaluation: Companies try to sell shares at the highest possible price.
• Hype Trap: Many IPOs (like Paytm, LIC) crashed after listing, trapping investors.

How to Analyze an IPO (RHP)

Don't just follow the herd. Check the RHP (Red Herring Prospectus):

1. Financials: Is the company profitable? Are profits growing?
2. Valuation: Is the P/E ratio reasonable compared to competitors?
3. Purpose: Why do they need money? (Growth = Good. Paying debt = Okay. Founders selling = Caution).
4. GMP: Check Grey Market Premium for market sentiment.

How to Apply for an IPO

You can apply via your Broker App (Zerodha/Groww) or UPI Apps (GPay/PhonePe).

1. Go to IPO section in App.
2. Select the IPO.
3. Enter Bid (Always select "Cut-off Price" to maximize chances).
4. Enter Quantity (1 Lot).
5. Accept UPI Mandate on your payment app.
   • Note: Money is blocked in your bank account, not deducted. It is deducted only if you get allotment. If not, it is unblocked.

7-Day Action Plan

Day 1: Check "Upcoming IPOs" on websites like Chittorgarh.com or Moneycontrol.
Day 2: Read the news about a current/upcoming IPO. Is it profitable?
Day 3: Check the GMP (Grey Market Premium) of that IPO.
Day 4: Login to your broker app and find the IPO section.
Day 5: Understand the "ASBA" process in your net banking (alternative to UPI).
Day 6: If a good IPO is open, apply for 1 Lot using Cut-off price.
Day 7: On listing day, check the price. Did it list at a premium or discount?

Quiz

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💡 Final Wisdom: An IPO is like a movie premiere. Just because the marketing is great doesn't mean the movie (company) is good. Read the reviews (financials) before buying the ticket.