Few days ago, leading business papers told you about mega Initial public offerings (IPO) ready to hit the market.
A leading coffee joint, an airlines that offers cheap rates and reasonably good service, an online retail website, all of them are about to issue their shares to public for first time. Post IPO their shares will get listed on a stock exchange.
You and me or for that matter big institutional investors can become a part owner of the company if we invest our money in that IPO.
A Party for Share Sale?
Companies can raise money through IPO (aka primary markets) at any time they wish to. More companies join the queue when stock markets are going up or atleast there is an expectation of it going up. So lot of them have plans to raise amounts as big as Rs 500-Rs 1000 crore. That’s why its a party. Its a party that gives you a chance to buy new companies at a good prices, provided the seller (aka promoter) is a giving a good price.
Its entirely upto you that how long do you plan to be in the IPO party..exit it when the stock gets listed on a stock exchange or hold it for few months or few years?
How to attend an IPO Party
1. Open a Demat account: A demat account is an electronic way of holding share certificates of a company. Its compulsory for companies to issue shares in demat form. When you are allotted shares in an IPO, the issuing company will transfer shares in the demat account which you will mention in the IPO form.
2. Selecting a Demat Service Provider: You can open a demat account with a stock broker or any private sector bank which has a broker license as well. Normally the broker or a bank will ask you to open a broking account as well. Its better to open a two way account as the shares you buy in an IPO can later be sold only if you have a trading account as well. However opening a trading account is not mandatory for an IPO.
For instance I prefer a private sector bank for a demat cum trading account for ease of transaction and monitoring. The money can be transferred easily from the bank account to the broking account and i can check my demat account while logging into my online bank account.
3. How do you invest in an IPO: Once you have an online broking cum demat account with a bank or a broker, they will give you an online access to your account. Your dashboard will show list of upcoming IPOs.
4. Process of applying in an IPO:Once the IPO opens for subscription, you will have to apply for a minimum lot of shares. The share sale happens through a bidding process. The issuing company will give you a price band within which you can bid for the minimum lot of shares. Also mention your investor category: a retail investor if you are putting not more than Rs 2 lakh, or a high networth investor or a firm.
So lets say a price band is of Rs 100-Rs 115 for a minimum lot of 10o shares. You can give multiple bids like apply for 200 shares at Rs 100 (give a cheque of Rs 20000) and 100 shares at Rs 115 each (cheque of rs 11,500).
With an online trading and demat account, you log into your account and click on the specific IPO and enter the amount of shares and the price at which you want to bid. cv, you can invest in an IPO by filling up the physical copy of the IPO form that will be available at your broker’s office or the bank’s broking branch.
The amount of shares you applied for will be blocked in your bank account but it will not be debited untill final allotment is done. Once shares are allotted, you will see them in your demat account(accessible through your internet banking account or the brokerage houses’s website)
Is an IPO Party Worth Attending at all?
It all depends on the price you pay for it. Leave it to an IPO expert to tell you if a particular IPO is worth putting your money in it. But the problem here is that everyone starts talking about how good the issuing company is, thereby creating a positive bias that makes you think “oh if 10 articles are saying its a good IPO, then i must put my money in it.”
So if you got a trusted financial adviser, seek out their help in understanding if any of the forthcoming IPOs will be worth looking at.
I may attend one of the many IPO parties that will begin and here are the few websites whose IPO analysis i will rely upon.
The purpose of this article is to educate you about pre-requisites of participating in an IPO. Nowhere does it intend to give or create a positive advice on forthcoming IPOs.