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initial public offering IPO

What is initial public offering of stock (IPO) explained with example

Initial Public Offer (IPO)

An initial public offering (IPO) is the first instance when the stock of a company is offered to the public. An IPO is a process through which a company can raise fund. The funds raised can be for any purpose such as restructuring debt, rewarding shareholders etc

 

what is ipo

 

EXAMPLE

Mr. X has a small Burger shop X burgers.

Mr. X wants to increase the number of locations so more people can enjoy its delicious Burger.

Although X burgers is profitable he doesn’t have the money to open new stores without taking debt from banks because for the loan he has to pay the interest.

Mr. X doesn’t want to take on more debts so decided to sell the shares of his business to the public in order to fund its expansion plans.

Mr. X goes to an investment bank to SET up the IPO.

The investment bank values X Burgers as 3,00,000 and decided to split it into 50,000 shares priced at 6 Rs per share, the investment bank sells 25,000 shares to the public and Mr. X keeps 25,000 shares as he owns the company.

Mr. X now has 150000 from investors who purchased its shares and Mr, X still holds 50% ownership in its company.

Happy Mr. X used the money to open 5 new stores increasing the company’s profits and values of its investor’s shares.

As simple as that.

 

Who can invest in IPO?

Everybody me, you, your neighbor, your maid, or any other person.

 

How to Apply for IPO?

Offline

What you can do though is walk into any of the SCSB’s offices ( all banks who have brokerage firms as well. So for example, Axis, Yes, Citi, Kotak, etc) fill out the physical form mentioning your demat account number on the form. Submit it there attaching the cheque.

The SCSB’s earn around Rs 100 per form and between 0.2 to 0.4% of the value of stocks you will get allotted. So everyone will be more than happy to welcome you if you walk in.

 

Online

Another way would be to apply online is through net banking login if you have your bank account with any of the SCSB’s like HDFC.

Below is the process to apply for an IPO through ASBA Online in HDFC, (If you have your account with any other bank please check if your bank offers this facility).

Login to your NetBanking Account.

Click on the link named “IPO Application” under Request on the left side menu.

Select one of the IPOs you want to apply for and mention up to 3 bids.
Enter your depository details.

Place and confirm your Order.

You would then be required to accept the “Terms & Conditions” before submitting the bid.

 

Conclusion: Initial Public Offer (IPO)

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