By now we have understood it well that companies or startups, even if they are doing it for the public welfare, they need funds. And funds help a company to run, manage its day to day activities, payout salary checks and more. But sometimes, it gets hard for the companies to manage all this on their own. So they seek refuge into the investors. Hence, comes the definition of the Initial Public Offering Process.
In this blog, we’re going to talk about Initial Public Offering Process: All You Need To Know About The Primary Market.
What is the Initial Public Offering Process?
When a company lists itself in the public exchange and wants itself to be traded publicly, then the IPO process is the first major source of the company acquiring some funds in their domain. So basically when a company is getting listed on the stock exchange, it offers some parts of its shares to investors and in turn, requests them to sell off the shares at some fixed price. And this entire process is known as the Initial Public Offering (IPO) Process.
So, this Initial Public Offering takes place to mark the value of the company’s stocks. And these shares are issued in the primary market at an offering price or introductory price by the lead underwriter.
How participation takes place in Initial Public Offering
So basically, the process of an Initial Public Offering is quite simple. The Primary Market that we are talking about is made of investment banks and broker-dealers. They are assembled by the lead underwriter. So it is the duty of these assembled investment banks and broker-dealers to allocate the shares to institutional and individual investors. So once the shares are allocated at the offering price, it is known as, “participating in the IPO process.” And this participation happens even before the security is first traded on any of the stock exchange markets.
Benefits of Initial Public Offering (IPO process):
So Initial Public Offering has got some of its perks.
- If the company is offering you its shares in the Initial Public Offering process, then it means that the company trusts you and you can expect a good relationship with them.
- The profit margins that you can expect for your stocks in a firm once it becomes successful, after buying IPO is very handsome.
These were some of the major reasons why you must opt for Initial Public Offering. Well, there are more, but let’s talk about the other aspects of the Initial Public Offering and its aspects in the Primary Market.
Risks involved in the Initial Public Offering
As we know, investment and trading are always full of risks. There’s no such investment scheme known as “risk-free” investment. And just like that, Initial Public Offering is also not a risk-free investment method.
Suppose you purchase a stock of a company in IPO at INR 10,000 per stock. Now, after a few months, you get to realize that the price of the stock gets reduced to INR 37.19. Now, what would you do? This means that even if you have supported the company by buying its shares, the company still couldn’t survive. Hence, all the investor money will be gone by now. Therefore, you must think a lot, research a lot about the company and then decide whether to buy the stocks or not.
How to stay safe while investing with IPOs
Now the IPOs are a bit hard to manage. With so many startups and businesses scaling so fast in so less time, it becomes difficult to analyze whether a stock is worth your time and money or not.
So in this situation, you must always read about the company thoroughly. Don’t follow any online trading “Guru” blindly.
So what you must do is read about the company’s potential in the future. There are many startups that focus on the need for today and that’s what they do. But on the other hand, they are missing out on future possibilities. So if you have a vision for something bid, then you must go with the IPOs for the firms that you really believe in.
Benefits of IPOs for Corporate Finance
Basically the objective of an Initial Public Offering is to give shares of the company to some specific trustworthy. On the other hand, there are many other benefits of IPOs that you must be aware of:
- A company can easily raise funds for itself based on the fact that the investor company can raise funds for itself because of directly participating in the Initial Public Offering.
- With an IPO, a company can get a lower cost of capital for both equity and debt.
- This way, the company’s image gets elevated and hence more chances of getting the client increases.
So this was all about the Initial Public Offering Process. We hope you liked this blog and understood it well. If you have any issues understanding anything, make sure you can talk to us on our Facebook and Instagram pages. We offer you one of the best stock market courses in Delhi