Getting an IPO or Initial Public Offering is the perfect rags-to-riches concept. But buying new stocks and selling them for a large profit just days or hours later is the perfect scenario? 

Despite the popularity of IPOs, they are not the sure thing. For every stock that takes off like a rocket post debut, they have lackluster results or become stagnant, for example, the Lyft and Uber IPOs. In some cases, they even burn, like Blue Apron. 

But before you rush to invest, knowing how to buy IPO stock is essential.

How To Buy IPO Stock - Table of Contents

What is an IPO or Initial Public Offering?

An IPO refers to the process of providing shares in a private corporation to the public as new stock. An IPO lets companies raise equity capital from public investors. The transition from a private company to a public one can be important as private investors can realize their gains from their investments. This includes a share premium for their current private investors. Meanwhile, it also provides public investors to take part in the offering. 

How Does an Initial Public Offering (IPO) Work? 

Before releasing an IPO, a private organization remains private. As a pre-IPO company, the business has a small number of shareholders, including the initial investors like family, friends, founders, and professionals like angel investors or venture capitalists. 

An Initial Public Offering or IPO is a significant step for a company as it offers access to the public to raise money. This provides the company with a more prominent ability to expand. This transparency and share listing ability are also significant in obtaining better options when seeking borrowed funds. 

When the company reaches a stage in the growth process where it is mature enough for the rigors of SEC regulations along with the added benefits to public shareholders. 

What Is the Purpose of an IPO?

A company or business resorts to an initial public offer to raise capital from the public. It helps the company gain access to public money and then expand. This is also a perfect exit strategy for the company investors and founders. It helps them in growing their profit. 

Advantages and Disadvantages of an IPO

The biggest scope of an IPO is to increase capital. But there are also some added advantages and disadvantages. 

Advantages: 

One key advantage is that the business gains access to investment from the investing public to raise funds. This helps provide easy acquisition and increases the company's exposure, prestige, and public image. This, in turn, helps improve profits and sales. 

There is also an increase in transparency that comes with the quarterly report that helps provide a company with better credit borrowing terms than a private corporation. 

Disadvantages: 

Corporations can showcase multiple disadvantages of IPO and choose alternate strategies. Some significant disadvantages include factors such as: 

• IPOs are highly expensive. 
• The cost of maintaining an ongoing public company and other unrelated costs of doing business. 
• Fluctuations in the company share prices can be quite distracting for management, which can be compensated and evaluated based on the performance of a stock.
• The company must disclose all its finances, including tax, accounting, and other business information.
• Rigid leadership by the board of directors can make it challenging to keep good employees.

How To Buy IPO Stock?

Step 1: Make a Decision

The first step in how to buy IPO stocks is to choose the IPO you want to apply for. You can find more company details in their prospectus or SEBI's website. The prospectus will give you an idea about the company's business and purposes. 

Step 2: Funding

You can use your savings account to make investments in IPO. But, in case you do not have sufficient funds, some banks and non-banking financial institutions will lend you money. 

Step 3: Create a Demat-cum-Trading Account 

A demat account is one of the prerequisites to applying for an IPO. It is a facility to store stocks and financial securities electronically. You can open a demat account with details such as PAN Card, address and ID proof, and an Aadhaar card. 

Step 4: Application Process

Once you have your demat account, you can apply through it. Once your demat account is active, you must apply under Application Supported by Blocked Amount (ASBA). This application authorizes banks to block money in your account. The facility eliminates the use of drafts and cheques. All you need to do is send your PAN, bank account details, demat account number, and bidding details. 

Step 5: Bidding

When you apply for shares, you must bid as per the lot size mentioned in your prospectus. The lot size is the minimum number of shares you must buy when applying for an IPO. There is also a bidding range that the company sets. The highest amount is known as the cap price, and the lowest is the floor price. You can always revise your bid during an IPO, but you must block the money when bidding. This blocked amount remains in the bank and helps earn interest. 

Step 6: Allotment

Based on the demand for the shares in the market, there is a possibility that you may receive lesser shares than you want. In some cases, you may not get any at all. In these situations, the bank will unlock all your bid money. Moreover, if you get a full allotment, you will receive a Confirmatory Allotment Note (CAN) within 6 working days post the IPO closure. Once you are allotted shares, they will be credited to your account. The next step will be to wait for the listing of the shares on the stock exchange. 

How to Invest in an IPO Online?

In order to invest in an IPO the investor needs to have a trading or demat account. The documents required for this are:

• Aadhar Card 
• PAN Card 
• Address proof 
• ID proof.

Once you set up your trading account, you can apply for an IPO through 2 methods - 

• ASBA facilities.
• UPI ID.

Invest in IPO Applying Through ASBA

Step 1: Log into your net banking account by using your Customer ID and password.

Step 2: Click on the request tab 

Step 3: Scroll down and find the Rights Issue/IPO option.

Step 4: Check the list of IPOs and click on ‘Apply’ for the IPO you want.

Step 5: Share your information in the next screen and details such as the number of shares, bid price, and date of birth. 

Step 6: When you click on proceed, you will be asked to confirm the amount. The amount will be blocked. Once you agree to the terms your application will be submitted. 

Invest in IPO Applying Through UPI ID

Step 1: Log into your trading account and select the IPO that you want to invest in.

Step 2: Enter the price you want for the shares and the number of lots. 

Step 3: Fill out the application form and add your UPI ID. 

Step 4: Give approval for the blocked funds as requested in the UPI app. 

Step 5: Complete.

Risks of Buying an IPO

As an investor, you must weigh the risks when buying an IPO. Some of the most significant risks involved are: 

• After the initial pop, the stocks may dip: The first-day pops of some IPOs are considered legendary, but that does not mean that they will work in the future. 
• Even the biggest names can fall: Twitter, Lyft, Uber, Spotify, and Facebook share rates fell substantially once their stock debuted. But out of these, only Facebook and Spotify have been able to increase their IPO price consistently. 
• Discounts offered initially may not be that good: As per brokers, the IPO price should have a 13-15% discount from the regular trading price once the stock becomes public. 
• IPOs need proper research and analysis: If you want to buy an IPO, you need to research the company's business model and understand its plans. 
• Do not assume IPOs are always profitable: Many companies enter the market without clear plans to generate sustainable profits. 

Is IPO a Good Investment?

IPOs get much media attention, some created by the company going public. In most cases, IPOs are quite popular as they produce a volatile price movement on launch day. This occasionally produces more significant gains but can also produce more considerable losses. In the end, investors need to judge each IPO as per the company prospectus and the individual's financial situation and risk tolerance. 

Conclusion

Buying IPO stocks is not easy, and there are multiple risks involved. It is not a sure bet, even if you understand how to buy IPO stock and have the necessary funds. So, most individuals who invest in IPOs should look at new companies carefully and limit their position size on individual stocks to a minimal percentage of holdings. That way, the risks are lesser.