What Is an IPO? Meaning, Process and Important Things to Know

IPO stands for Initial Public Offering. It generally refers to the process through which a company offers its shares to public investors for the first time. After the applicable issue and listing process, the company's shares may become available for trading on a stock exchange.

IPO Meaning in Simple Words

Before an IPO, a company may be owned by founders, promoters, private investors or other existing shareholders. An Initial Public Offering can allow eligible public investors to participate in the ownership of the company by applying for shares according to the terms of the issue.

Why Does a Company Go Public?

Companies may launch an IPO for different reasons. The purpose of a particular issue is generally described in the relevant offer documents.

• To raise funds for business expansion.
• To support future business requirements.
• To repay or reduce certain borrowings.
• To fund specific objectives described in the offer documents.
• To allow an offer for sale by existing shareholders, where applicable.

How Does an IPO Work?

The exact process can vary depending on the issue and applicable requirements, but an IPO generally involves several stages.

• The company prepares for the public issue.
• Relevant disclosures and offer documents are prepared.
• The IPO opens for eligible investors to apply.
• Applications are processed according to the applicable rules.
• Shares are allotted to successful applicants.
• The company's shares are listed on the relevant stock exchange.
• After listing, the market determines the trading price of the shares.

What Is IPO Allotment?

IPO allotment is the process through which available shares are allocated to successful applicants according to the applicable rules and issue structure.

If demand for the IPO is greater than the shares available for a particular investor category, not every applicant may receive shares.

What Happens After an IPO?

After the applicable process is completed, the company's shares may be listed and begin trading on a stock exchange. The market price after listing may be higher or lower than the issue price.

There is no guarantee that an IPO will provide a listing gain or generate positive returns.

What Should Investors Review Before Applying?

• The company's business model.
• The industry in which the company operates.
• Financial information.
• Debt and other relevant obligations.
• The purpose of the issue.
• The price or price band.
• Relevant valuation factors.
• Risk factors described in official documents.

IPO Risks to Understand

An IPO should not be considered a guaranteed-return investment. Like other equity investments, it can involve several types of risk.

• Market prices can be volatile.
• Listing gains are not guaranteed.
• Business performance may affect the share price.
• Industry conditions can change.
• Economic conditions may influence market sentiment.
• An applicant may not receive an allotment.

IPO vs Buying Already Listed Shares

An IPO allows eligible investors to apply for shares during the initial public offering according to the issue terms. Buying already listed shares generally takes place through the stock market after the shares are available for trading.

The price, availability and method of participation may differ between an IPO and shares already trading in the market.

Common Mistakes to Avoid

• Applying only because an IPO is popular.
• Assuming that every IPO will give listing gains.
• Ignoring the company's business and financial information.
• Not reading the relevant risk factors.
• Investing money needed for essential expenses.
• Making decisions based only on rumours or market excitement.

Key Takeaways

• IPO means Initial Public Offering.
• It is generally the first public offering of a company's shares.
• Eligible investors may apply according to the issue terms.
• Allotment is not guaranteed.
• Share prices can rise or fall after listing.
• Investors should review official information and understand the risks before investing.