Do you know how companies use their big money to grow? It is simple. One of the best ways is IPO ”Initial Public Offering”. Through IPO every company introduces themselves in the stock market, where every individual investor can buy the company’s share.
This article will help you with IPOs in simple words, whether you are 18 or 50, with practical tips and real examples. Let’s explore-
- Before IPO: Company is private, shares owned by founders or private investors.
- After IPO: Company has been introduced to stock market and anyone can buy shares.
Why Do Companies Launch An IPO
Every company has their own reasons to be introduced in the stock market, but here are some common reasons.
- Raise capital: Money of new investors helps to grow the company.
- Liquidity: Early investors and founders can sell shares to realize gains.
- Public Image: Being listed helps in marketing and to gain popularity.
How Does an IPO Work?
The IPO journey has clear steps:
- Select underwriters: Take Bank’s help to fix your shares price.
- Draft Red Herring Prospectus (DRHP): Detailed document disclosing company financials, risks, and IPO details.
- Regulatory Approval: Maintain regulatory, Authorities like SEBI in India approves IPO.
- Marketing: Invest in marketing which attracts new investors.
- Subscription: During subscriptions period Investors apply for shares.
- Listing: Shares are allotted and start trading on the stock exchange.
Important Things to Know Before Investing in an IPO
Before you invest your hard earned money you need to know the points:
1. Understand the Business
- What is the strong point of the company?
- Will it be very risky?
- Does the company have future plans?
2. Check Financials
- Review companies past performance.
- Debt levels – Company has few or no debt cause debt could be risky.
3. Compare Valuation
Look at valuation multiples like P/E ratio compared to similar companies:
| Metric | IPO Company | Industry Peer | Comment |
| Price/Earnings | 25 | 20 | IPO seems pricier |
| Price/Book | 3 | 4 | Fairly valued |
| Debt/Equity | 0.4 | 0.6 | Lower debt is positive |
4. Promoter & Management Background
- Who has the company’s control?
- Look if that company has a good management history or not.
- Clear and credible leadership inspires confidence.
5. Purpose of IPO Funds
- Look where your money is being used.
- Expansion is usually positive, Making regular losses could be risky.
6. Industry Outlook
- Is the company making profits?
- Competitive landscape?
- Example: Technology IPO grows more than any other resources.
What Is GMP (Grey Market Premium) in an IPO?
Grey market premium is a price where an IPO is sold unofficially before being listed at. Here, investors buy and sell IPO shares unofficially, ahead of the actual public listing.
The Grey Market Premium (GMP) is the extra amount investors are willing to pay for their preferable IPO in the informal market, if the IPO price is ₹200 per share, and the GMP is ₹50, it means investors are ready to pay ₹250 per share before the shares actually get listed.
Why Does GMP Matter
- The GMP reflects what the investor expects from the IPO.
- A high GMP usually indicate a good listing day performance.
- Conversely, a low or negative GMP suggests cautious or weak demand.
Important Things to Know About GMP
- GMP is not monitored on regular basis so it can sometimes be hampered.
- It does not guarantee for long-term IPO performance.
- Trading in the grey market involves higher risks due to lack of transparency and regulation.
GMP vs Listing Price Comparison
| Aspect | GMP (Grey Market Premium) | Listing Price |
| Market | Unofficial grey market | Regulated stock exchanges |
| Price Determined By | Investor demand, speculation | Issuer company & merchant bankers |
| Timing | Before IPO shares are officially listed | On the first day of trading |
| Regulation | Unregulated | Regulated by SEBI or relevant bodies |
| Reliability | Useful indicator but can be volatile | Official and binding |
In simple terms, GMP is like a “preview price” showing how hot or cold the market feels about a new IPO, helping investors gauge interest but should be used with caution.
IPO Real Life Example
Consider a tech startup recently issue an IPO to fund expansion into AI services. They showed strong revenue growth for 3 years, moderate debt, and a capable management team. Due to positive industry trends and clear growth plans, investors saw potential despite a high valuation.
Common IPO Myths Busted
Myth 1: IPO grows money over the night.
- IPO depends on listing and market mood, some company shatters after listing.
Myth 2: Big company would be a safe option.
- Profit depends on the market and not on the company’s name.
Myth 3: IPO shares are not for sale
- IPO gets sold easily until listing.
Important Actionable Steps Before Investing in an IPO
- Before investing, be skeptical about DRHP documents .
- Compare IPO valuation with listed peers.
- Verify revenue and past performance.
- Consult an adviser for better knowledge and safer steps.
- Don’t invest too much as a beginner.
Conclusion:-
IPO is interesting and exciting with perfect knowledge and analysis. By understanding market behavior and IPO values, company’s worth, busting common myths, anyone can make great profits.
Ready to explore IPOs? Take your step after good analysis and perfect resource. For more on investing basics, visit : Online Finance Tips, Investopedia or Forbes.
