An IPO Account

A company may get established with funds from angel investors, venture capitalists and it can even be self-funded. However, for a company to grow and develop, it must have sufficient funding. After it has been created, the owners/promoters may find it challenging to produce funds in order for the company to expand. Owners’ resources soon get depleted and funding from elsewhere has to be arranged. There are two options that owners of a company may consider in such scenarios. Either they may borrow funds from banks, or propose and offer an IPO (initial public offering). A less desirable alternative may be borrowing funds from banks as they charge heavy interest which a new company can ill afford. Offering IPOs is a better option for companies as investors investing in an IPO can cash in on a nascent company’s growth curve and the company can obtain funds for it to grow.



Initial Public Offering

In advance of your investment in any upcoming IPOs, there are some aspects of IPOs you should be aware of. An IPO, or an initial public offering, is, by definition, an offering of equity stocks by a company. These equity stocks are offered to the public for the very first time (hence ‘initial’) on the stock market (the open market). The company that offers an IPO does so to raise capital via trading IPO stocks and shares. When an IPO is traded on the open market, a fraction of stocks and shares is reserved for individual investors. The rest may be offered to high net-worth people and institutional purchasers.

Initial Public Offering

Features of an IPO

You may already hold investments such as a mutual fund investment , or bonds. These may be held in a Demat account. You may want to allocate your additional funds to different asset classes and invest in an IPO with a view to diversifying your portfolio. Before you do this, it’s vital that you learn about key features of IPOs mentioned below:

  • Shareholders:

    When a company needs wealth to grow itself, it offers the public shares in return for hard cash. In other words, the management of the company relinquishes a part of the company’s ownership to investors who become shareholders.

  • Processes Involved:

    An IPO consists of many processes through which investments are made. First, the said company offering it gets underwriters to make sales of stocks to the public. The company also has to apply to, and attain registration from, the Securities and Exchange Board of India (SEBI). Then, the company holds roadshows to get subscribers to apply for the IPO. After the issue closes, the IPO is listed on exchanges like the Bombay Stock Exchange and the National Stock Exchange.

  • IPO Issues:

    IPOs are not restricted to just equity shares. Companies have the freedom to issue IPOs for bonds and non-convertible debentures too.

  • Online Application:

    IPO online application is available once you have a Demat account. You can do this through a prominent brokerage like Motilal Oswal.

  • Competitive Pricing:

    Before you think of an IPO investment, you should look at competitive companies’ upcoming IPOs.

  • Allotment:

    You can apply for a quantity of shares in an IPO. In case allotment is not granted, your funds get refunded directly into your bank account.

How to Apply for an IPO with a Demat Account

The first and foremost thing to do to apply for an IPO is to open a Demat account with a registered broker like Motilal Oswal. Opening a Demat account is easy online and all you need to do is follow these steps:

  • Visit the website of a broker like Motilal Oswal. You will see a tab for ‘opening Demat account’. You can click on this.
  • You will need to fill in a form with your information and details requested.
  • Once you submit the form, you will have to upload documents for KYC verification such as your PAN and Aadhaar Cards.
  • Once these are verified, your Demat account will be up and running for you to invest in an IPO.

Since application to an IPO involves an investment in a company’s equity stocks, you need a Demat account opened. This is automatically linked to a trading account with most brokerage firms. When you choose an IPO to invest in, through your broker, you can easily invest in it by filling in an online application with your Demat details. This is an online menu-driven process and is very quick and simple. Your Demat account is invariably connected to your bank account so funds can be used for subscription to any given IPO.

Advantages of IPOs

You can expect the following benefits from investing in an IPO, whether it is for bonds, stocks or non-convertible debentures:

  • Early Investment:

    For the long haul, investing in a new company and growing with it can prove potentially fruitful from an investor’s point of view. Any company, for instance, that comes up with a novel or innovative creation could be lucrative over time and you would gain from your investment

  • Short-term Gains:

    Most IPO investments bear some fruit in the long run. However, there are companies that see gains as soon as they’re listed on exchanges. Small Investor Preference – Under the guidelines laid forth by the Securities and Exchange Board of India (SEBI), small investors may get favoured treatment when shares are being alloted. Small investors may even get some discount on the price of equity stocks.

  • Transparency:

    Shares in an IPO are far more transparent in terms of their value and pricing than shares listed on stock exchanges. Investors know what accurate prices are, and there are no discrepancies.

How to Invest in IPOs

The moment you have a Demat account set up, and which is linked to an online trading account, you can make your choice of IPO to invest in. However, you will need to do some homework to know how to invest in IPOs. The IPO invested in should suit your requirements, both financially and based on your long-term goals. Here are some handy hints of how you should go about investing in an IPO:

  • Be Informed:

    Opening Demat account processes are just a part of your journey to being successful with an IPO investment. Remember that these are privately-held companies being invested in, so public information may not be readily available. You may have to take a lot of effort to find information on a company to be invested in. You can look for whether there is a market for the service or product the company is selling, get an idea of track records of company professionals in management, and find out how much debt the company has, if any. Answers to these questions will be indicators of whether a given company has a promising future.

  • Company’s USP:

    If you are investing in equity stocks or bonds through a company IPO, find out what the ‘unique selling point’ of the company is. You can also find out whether it has the potential for success if it has any already existing top-notch competitors.

  • Read A Lot:

    You may be wondering what you have to read, but a prospectus usually comes with an IPO. This may look like a thick booklet to you, but it contains vital information about the company and the IPO. You must ‘read the fine print’ before you sign up.