As a company announces its IPO. News channels, you tube and social media starts flashing headlines. Investors start contacting each other to gain knowledge about company and who all are applying.
And suddenly, everyone feels they might miss a big opportunity if not applied.
But here’s the truth, most people who apply for IPOs don’t really understand what they are buying.
The simplest definition of an IPO is –
An IPO is the first public sale of ownership in a business. Before the IPO, the company belongs to founders, early investors and employees. After the IPO, you are invited to become a small owner.
1. What is an IPO?
IPO stands for Initial Public Offering.
When a private company sells its shares to the public for the first time, it is called an IPO.
Before an IPO:
- The company is privately owned
- Shares are not freely tradable
- Ownership is limited
After an IPO:
- Anyone can buy its shares
- The company gets listed on a stock exchange
- Ownership becomes public
When you apply for an IPO, you are not buying a product. You are buying a fraction of the company itself, its future profits, risks and decisions. Even if you buy just one share, you are legally an owner.
2. What Does IPO Stand For?
Let’s break the term down instead of memorizing it.
- Initial → The first time ever
- Public → Open to everyone, not just insiders
- Offering → Shares are offered for sale
So, The first time a company offers its ownership to the public.
Companies don’t start as public because:
- Compliance is expensive
- Disclosure rules are strict
- Founders prefer control in early stages
Going public is usually a later decision, not a starting point.
3. Why Do Companies Launch an IPO?
Most people think the only reason is raising money. That is partially correct.
Common reasons companies go public –
1. Raising capital – To expand, reduce debt or fund new projects.
2. Brand visibility – A listed company gains trust, recognition and credibility.
3. Exit for early investors – Venture capitalists and early backers eventually want liquidity.
4. Employee wealth creation – Employees holding ESOPs can convert paper wealth into real money.
5. Currency for acquisitions – Public shares can be used to buy other companies.
4. How Does an IPO Actually Work?
Let’s learn with an example -.
- A company decides it wants to go public
- It hires investment banks
- These banks help value the company
- A price band is decided
- Investors apply for shares
- Shares are allotted
- The stock gets listed on the exchange
Once listed, the share price is no longer controlled by the company. It is controlled by market demand and supply.
5. How to Invest in an IPO
The process is broadly similar across most countries.
What you generally need to know is:
- A stockbroker or trading platform
- An account that can hold shares (Demat or equivalent)
- Bank account for payment
Types of investors:
- Retail investors – individuals
- Institutional investors – mutual funds, banks, insurance firms
Retail investors usually get limited allocation, which is why:
- Allotment is not guaranteed
- Oversubscription reduces chances
Applying does not mean receiving shares.
6. How to Check IPO Allotment Status
After the IPO closes, shares are allotted based on demand. Allotment status can usually be checked via:
- The IPO registrar’s website
- Stock exchange websites
- Your broker’s application
Allotment is a probability, not a promise.
Many first time investors learn this only after applying.
7. What Is GMP in IPO? (Grey Market Explained)
GMP stands for Grey Market Premium. It refers to the unofficial price at which IPO shares trade before listing.
Here’s the honest truth most will avoid saying:
- GMP is not regulated
- GMP reflects short-term demand, not long-term value
- GMP can be influenced or manipulated
- High GMP does not guarantee listing gains
- Low GMP does not mean a bad business
GMP is a sentiment indicator not a valuation tool.
8. What Is an SME IPO and How Is It Different?
SME IPOs are meant for small and medium enterprises.
Key differences :
- Smaller issue size
- Lower compliance costs
- Limited public float
- Lower liquidity after listing
Risks to understand :
- Price volatility can be extreme
- Exit may not be easy
- Information availability is limited
SME IPOs can reward investors but only those who understand the risks deeply.
9. How to Buy Pre-IPO Shares
Pre-IPO shares are bought before a company goes public. Common routes include :
- Private placements
- Early employee share sales
- Secondary markets for unlisted shares
Why this is risky:
- No public valuation benchmark
- Limited disclosures
- No guarantee of IPO
- Liquidity is uncertain
Pre-IPO investing is closer to private equity, not stock market investing.
10. IPO Myths Most Beginners Believe
Let’s clear some common misunderstandings.
- IPOs always give listing gains
- Famous brands are safe investments
- High GMP means guaranteed profit
- IPO price equals fair value
Reality is often different.
Many IPOs underperform after listing especially when the hype fades.
11. IPO vs Long-Term Investing
A company’s IPO price is not its destiny.
What matters more:
- Business fundamentals
- Profitability path
- Competitive advantage
- Management quality
Some great companies disappoint at listing. Some ignored IPOs create massive wealth over time.
The market rewards patience, not excitement.
12. Should Everyone Invest in IPOs?
IPOs are opportunities, not lottery.
They offer:
- Early access to companies
- Potential upside
- Learning experience
But they also carry :
- Uncertainty
- Hype-driven pricing
- Allocation risk
The smartest approach is Invest with understanding, not excitement.