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An initial Public Offering, often known as an IPO, is the first time that a privately held firm has sold its shares to the general public. Initial public offerings (IPOs) enable businesses to secure funding from private investors in the form of equity. The transition from a private to a public company is typically accompanied by a share premium, making it a favorable opportunity for private investors to realize profits. All members of the general public are welcome to participate in the offering.

How Does An IPO Work?

Terms Associated with IPO?

To understand IPO, one must know some basic terms. Some of the commonly used terms are: –

Fixed Price Ipo & Price Band

Fixed-price IPO is the price some companies set for the initial sale of their shares. A price band is a value-setting method in which a seller sets an upper and lower cost limit for bidders. Price range guides buyers.

Book Building

Underwriters and merchant bankers use book building to determine the IPO price. Underwriter makes a book with institutional investors' and fund managers' bids for shares and price.


An underwriter can be a banker, FI, merchant banker, or broker. It helps the company underwrite its stocks. The underwriter promises to buy any unsold IPO shares.


An issuer is a company that wants to sell shares on the secondary market to finance its operations.

Benefits Of IPO

When a company goes public, investors can sell stock. This lets investors profit without repurchases. Increases investor liquidity since shares can be bought or sold anytime.

Brands are built on trust. By making a product or service public, you build consumer confidence in your brand. This boosts sales and profits.

Going public encourages managers to pursue profits over growth or expansion. It helps shareholders communicate because they can’t hide problems.

Going public helps the company raise money. SEBI allows a company to raise 20% of its capital via IPO. This helps businesses grow and expand.

Comparison Of IPO with Other Products

Defination New fund offering (NFO). Asset Management Company launches a new fund. IPO means new stocks. Companies issue these when listing for the first time.
Valuation NFO invests the complete fund as units. Performance drives IPO valuation. This is measured using P/E and P/V ratios.
Price NFOs cost Rs. 10 each. NAV is based on market conditions, so this value is insignificant. The valuation of IPO shares depends on company fundamentals and demand.
Usage Of Funds NFO raises funds to invest in bonds and securities to profit from a lucrative theme. IPO funds are used for expansion, debt repayment, and promoter stake reduction.
Listing NFO invests funds based on NAV. This can be above or below the face value. IPOs must be listed at or above a predetermined price range. If the price rises on the listing day, investors can gain substantially.
Risk NFOs are for moderate-to-low-risk investors. IPOs pose stock market risk.
Investors No categorization. IPOs are ideal for retail, institutional, HNI investors, etc.

Why Should You Invest in IPO

Types Of IPO

Following are the two types of IPOs in India:

Fixed Price Issue

The company going public decides the price of its shares. In a fixed price offering, investors don't have to wait until allocation to know share price. The price is announced with the IPO Subscribers pay the full price.

Book Building Issue

Investment banker sets price of IPO. The price band is often 20%. Investors choose the IPO price. The price band's maximum price is the 'Cut-Off Price.' Minimum price is called 'Floor Price.


A company’s IPO specifies the minimum number of shares an investor can buy. This is the IPO bid lot or minimum order quantity. If a company specifies 100 shares as the minimum order quantity, an investor can only apply for multiples of 100. Investors can request 100, 200, 300, etc. shares.

Primary market is where investors buy shares directly from the issuer company.
Secondary market is where stocks are traded after being offered to investors in primary market (IPOs) and listed to stock exchange. Secondary market comprises equity and debt markets. Secondary market trades listed equities, while primary market is how companies enter secondary market.

IPOs are oversubscribed. This means share demand is higher than supply. In such a situation, many investors fail to get shares. It’s best to bid for IPO shares on the last day. So, one can estimate the subscription cost. Also, bid for just one lot and don’t lock up capital.

IPOs are tax-free. IPO shares aren’t taxed until they’re sold. IPO profits are capital gains. Longevity determines the capital gains tax rate. If you held the shares for more than a year, you would have long-term capital gains. Short-term gains are taxed at 15%. The long-term ROE is 10%. (years) Any equity gains over Rs. 1 lakh is taxable.

Book-building IPOs offer investors a 20% range to bid on shares. Bidding determines the final price. 20% price bands. Retail and institutional buyers must bid in this. The IPO floor price is the band’s bottom bid. It can’t be above the IPO cap. Bidders can revise while the book is open. Book building lets issuers set price and demand.

How you can Apply for IPO through Swaraj Finpro

It is quite easy to invest in IPO through Swaraj FinPro
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