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What Is IPO? How Can You Make Money From It?

Updated: Nov 13, 2020

IPO (Initial Public Offering) is done by a company for multiple reasons like to expand the business, to pay off debt, for working capital, etc.

At the start, companies try to raise capital from its shareholders, private investors, or venture capitalists but after a certain point, it can go public to raise capital from the public.

For now, generally, unicorn start-ups (the start-ups that valued more than $1 Billion) go public otherwise, companies that have good profitability and continuously growing with a vision can also go public (depends on SEBI guidelines).

After going through a long process of documentation with IPO teams, the company make their financials public and make a public announcement to gain the interest of the public.

IPO remains open for at least three working days and cannot exceed ten working days. After that, it will be listed on the Stock Exchange (NSE/ BSE).

A company can do IPO in three ways;

1. Fixed Price Issue

2. Book building Issue

3. Combination of these.

In the Fixed Price Issue, the company decides the exact amount of share value. So investors have the unit price of share before the company goes public and accordingly lots are assigned.

You cannot buy a single share of the company in IPO, the company decides lot size & you’ve to bid for the no. of lots you want to buy.

In the Books Building Issue, the company determines the ‘range of price’ they want to sell the unit share for. Investors have to bid no. of lots to buy & unit share value they want to buy it for between that range. Once bidding is closed the company builds a book, decides the unit share price & allot the lots.

In Book Building Issue the lowest price in the decided price range is called ‘Floor Price’ & the highest one is called ‘Cap Price’. During bidding, you can use the option of ‘cut-off’ price also. The cut-off price is the final price decided by the company after the bidding is closed. When investors do not want to lose the lot allotment because of bidding lower price than the final price they can choose a ‘cut-off price'.

Categories for investors to invest in IPO are QIB, RII, NII, Anchor investors. A fixed percentage is reserved for each category & bids can be withdrawn until the day of allotment depending on the category.

1. Qualified Institutional Bidder- QIB

Angel Broking IPO Offer Size by Investor Category

Fund managers, portfolio investors, financial institutions, commercial banks, etc. fall under this category.

These investors cannot bid using the ‘cut-off price’ option.

2. Retail Individual Investor- RII

Indian Resident Individuals, Non-Resident Indians (NRIs), and Hindu Undivided Families (HUFs) fall under this category.

Investors in this category can use the ‘cut-off price’ option.

The maximum amount can be invested is limited to Rs.2 lakh.

3. Non-Institutional Investor- NII

Investors who fall under the RII category but want to invest more than Rs.2 lakh can bid through this category.

These investors cannot bid using the ‘cut-off price’ option.

4. Anchor Investor

Investors who fall under QIB & RII category & bidding for more than Rs.10 crore can bid through this category.

These investors cannot bid using the ‘cut-off price’ option.

Subscription status

Angel Broking IPO Subscription Status (Bidding Detail)

The number 5.74x in the QIB column simply means 5.74 investors are bidding for 1 share (1:5.74) and total 3,934,425 share were offered in the QIB category (the data shows competition for each share).

Similarly for the rest of the categories.

How do people make money?

When the company announces IPO at a certain price say Rs.500 per share & lot size is of 50 shares. Investors depending on category bid for the same. After the day of allotment each investor may or may not get a lot/ lots (this is done by a lottery system & totally depends on the luck).

After 7 days of IPO, suppose an investor gets allotted with Rs.500 per share & with a lot size of 50 shares (total investment of Rs.25000). If the company gets listed at Rs.700 (on NSE/ BSE) investor make a profit of Rs.10000 in only 7 days. And if the company gets listed at Rs.300 (at NSE/ BSE) investor make loss of Rs.10000 in only 7 days.

This is a quick way to make money but you cannot become a millionaire because their is certain limit to each category.

Further Public Offer (FPO)

When a company which is already listed on a stock exchange, i.e. it is a listed company, and it makes a fresh issue of securities or an offer for sale to the public, it is known as Further Public Offer (FPO), or Follow-On Offer.

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