ayush gupta
Through Initial Public Offerings ( better known as IPO), companies raise capital from investors, which they can use for expansion, debt repayment, or other corporate purposes.
IPOs also allow investors to buy shares in the company early, often leading to significant attention and potential for price volatility, making them key players in market dynamics. This way, IPOs play a pivotal role for companies as well as investors.
Types of IPOs
When you explore the market for upcoming IPO, it is important to understand what type of IPO the company is offering. Typically, there are 2 main types of IPOs. Read on to understand them and then choose what best suits your needs.
1. Fixed Price Offering
A Fixed Price IPO is offered when a company sets a predetermined price for its shares during its initial public offering (IPO). Investors are informed of this price before the shares are made available to the public. Unlike other methods, the demand for the stock is only revealed after the issue closes.
In a Fixed Price IPO, investors are required to pay the full price upfront when applying for shares. Being so straightforward, this method offers transparency in pricing, but the potential for price fluctuation after the IPO can impact investors’ returns based on market demand post-issue. Here, the shares are allocated depending on the applications received at a fixed price.
2. Book Building Offering
A Book Building IPO allows investors to bid for shares within a specified price range rather than having a fixed price. The company sets a price band, with the lowest price known as the floor price and the highest as the cap price.
During the subscription period, investors submit bids indicating the number of shares they want and the price they’re willing to pay. Once bidding closes, the final price is determined where demand meets supply.
This dynamic process offers flexibility, letting market forces influence the price, making it a more market-driven approach compared to Fixed-price IPOs.
Other Terms Assosiated with IPOs
If you are planning to enter the world of IPOs, keeping an eye on the upcoming IPOs is not enough. You should have adequate knowledge about the sector, the industry, and the company in which you are investing. Experts believe that investing within your circle of competence can offer you more benefits.
Below are some keywords/ terms that are commonly used and can help you increase your IPO knowledge.
1. Issuer
The issuer is the company that is issuing the shares in the market.
2. Price Band
The price band is the value-setting technique. This is the range within which a seller offers an upper and lower cost limit. The buyer buys within this range.
3. DRHP
Draft Red Herring Prospectus is the document issued by the company and approved by the SEBi.
4. Oversubscription
An IPO is considered oversubscribed when investor demand exceeds the number of shares offered by the company. This indicates high interest in the types of IPO, often leading to a higher final share price.
5. Under Subscription
On the contrary, an IPO is undersubscribed when the number of shares offered by the company exceeds investor demand. This signals lower market interest or confidence, often leading the company to reconsider its pricing or the size of the offering. Undersubscription can result in a weaker stock debut on the market.
Conclusion
As an investor, an IPO investment can indeed be a smart move. However, making an informed decision plays a crucial role here. Understanding the company you wish to invest in, its strengths and weaknesses, the types of IPO it offers, etc., are significant factors that you need to consider before you take the plunge.
