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What is meant by IPO and what are different types of IPO?

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IPO (Initial Public Offering)

A company which is unlisted and wants to raise funds from public then it can be done with the help of IPO. Usually IPO's are issued by companies in primary market to raise funds from public. As we know that companies needs capital to carry out different functional and operational activities and to meet this need they sell companies securities in primary market. The company gets a capital boost when an investor invests in its IPO and in return investor expects to get benefited from companies earnings proportional to their share holding.



Types of IPO

1) Fixed price issue

In fixed price IPO company offers its shares at a fixed price. Here company along with its underwriters analyze companies assets, liabilities and other financial parameters . After this they fix a price per issue. Under fixed price issue, investors know the share price before a company offers its shares to public and they need to pay full price while applying through an IPO. In-case of fixed price often company's shares are undervalued and therefore more number of investors are attracted towards it.

2) Book Building Issue

The concept of book building issue is quite new in India. Under this type of IPO price is discovered during the process of IPO. Book building issue has no fixed price but it has a price band. The lowest price band is know as floor price and highest is known as cap price. In order document this price band is printed. Investors here bid for desired quantity of shares with price they are willing to pay. On the basis of these bids a company decides its share price. Demand of fixed price issue can be known only after the issue is closed but in-case of book building issue it can be known everyday.

In market number of fixed price issue is much more than book building issue but after market price corrections capital gained from book building issue is more.

Advantage and disadvantage of IPO to an investor

IPOs are available to those only who are aware about it. Many investors prefer to invest in it because value of IPO shares is really high when they are first time sold in the stock market.

There are many restrictions with IPO because of which investor do not want to invest in it. Like an investor can not sell it in first 30 days. If In-case its value rises in that duration and investor is willing to sell to earn profit but then also he can not do so as it is not permitted in first 30 days.

These are some important facts related to IPO which an investor must be familiar with. To invest in stock market investors has to incur extra cost in the form of brokerage. To save this huge brokerage cost investors can now open their free demat account with Pehla trade-a growing discount brokerage firm. We facilitates to trade by paying flat Rs1 per executed order for beginning one month. Join us now to improve your trading experience.
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