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

Despite their popularity, IPOs are not a sure thing. For every stock that takes off like a rocket after its debut, it has lacklustre results or becomes stagnant, as in the Lyft and Uber IPOs. In some cases, it even burns, 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 providing shares in a private corporation to the public as new stock. It 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 allows 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, such as family, friends, founders, and professionals like angel investors or venture capitalists. 

An Initial Public Offering (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 rigours 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. This helps the company gain access to public money and then expand. It is also a perfect exit strategy for the company's investors and founders, helping them grow their profit.

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Advantages and Disadvantages of an IPO

The most extensive scope of an IPO is to increase capital. However, 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. 

The quarterly report also increases transparency, helping to 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 business costs. 
• Fluctuations in company share prices can be quite distracting for management, which can be compensated and evaluated based on a stock's performance.
• 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.

Things to Consider Before Buying an IPO Online in India

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. 

2: Funding

You can use your savings account to invest in an IPO. However, some banks and non-banking financial institutions will lend you money if you do not have sufficient funds. 

3: Create a Demat-cum-Trading Account

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

4: Application Process

Once you have your demat account, you can apply. Once your demat account is active, 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. 

5: Bidding

When applying for shares, you must bid according to the lot size in your prospectus. The lot size is the minimum number of shares you must buy when applying for an IPO. The company also sets a bidding range. 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. 

6: Allotment

Based on the demand for the shares in the market, there is a possibility that you may receive fewer 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 six working days after the IPO closure.

Once you are allotted shares, they will be credited to your account. The next step is to wait for the shares to be listed on the stock exchange.

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How to Invest in an IPO Stock Online in India?

The investor must have a trading or demat account to invest in an IPO. 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.

Method 1: How to Apply For an IPO Through ASBA?

Step 1: Log into your net banking account 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 IPOs list and click ‘Apply’ for the IPO you want.

Step 5: On the next screen, share your information 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, which will be blocked. Once you agree to the terms, your application will be submitted.

That's it. You are done.

Method 2: How to Apply For an IPO 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.

What are the 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 most prominent names can fall: Twitter, Lyft, Uber, Spotify, and Facebook share rates fell substantially once their stock debuted. But only Facebook and Spotify have consistently increased their IPO prices. 
• 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. 
• Proper research and analysis are essential for IPOs. If you want to buy one, you must 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 pretty popular as they produce a volatile price movement on launch day. This occasionally produces more significant gains but can also make more considerable losses. Ultimately, 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.