5 Important Terms to Know in IPO for Beginners

 

Initial Public Offerings (IPOs) have become a significant trend in the financial world. Particularly in India, the IPO market is booming. In 2024 alone, India has emerged as the top market for IPOs in Asia, having raised $3.9 billion so far this year.

With new IPOs, the value is expected to bypass $20 billion over the next two years. Hence, understanding key IPO terms is crucial for beginners to make the right investment decision. So, read this blog to know the top 5 terms linked to IPO.

Top 5 Important Terms Linked to IPO

When applying for the IPO, there are certain terms that you should be aware of. The primary ones are:

1. ASBA (Applications Supported by Blocked Amount)

This process is designed by the Securities and Exchange Board of India (SEBI) for applying to IPOs. When the investors apply for the IPO, the amount equivalent to the asked bid is blocked in the investor’s account. This ensures the fund is safe and is earning interest.

If the shares are not allotted, the money is unblocked in the account without delay, effectively streamlining the refund process. You need to know this to apply for the forthcoming IPO.

2. Prospectus

For an IPO, there are two types of prospectus that you should know.

The first is the Abridged Prospectus, which includes a summarized version of the main IPO prospectus as required by the Companies Act, 2013. It highlights the main information to help investors make decisions.

The second is the Red Herring Prospectus (RHP), which is the draft filed with SEBI at least 21 days before the IPO. This includes information about the company and IPO, including objectives, management credentials, company description, price band, IPO calendar, and so on. This then converts to the Final Prospectus.

3. Book Building Process

This is a method used in IPOs for price discovery. It involves setting a price range or price band. The underwriters decide the price band for different categories of investors, including retail investors and Qualified Institutional Buyers.

The investors place their bids for the shares under this range. The final issue price is determined based on the demand from these bids. This helps in establishing a fair market value for the company's stock.

4. Price Band

The price band of the IPO defines the upper and the lower limit within which the investors can place their bids. Say a company sets the price band as ₹100-150; then the investor can bid only in this range.

It is set by the issuing company and its underwriters based on a preliminary valuation. The final share price is fixed after analyzing all bids within this range.

5. Bid Lot

This represents the minimum number of shares that you must apply for in an IPO. The main aim is to ensure an even distribution of shares while assuring more investors can place their bids.

The size of the bid lot, detailed in the IPO prospectus, sets the minimum investment threshold for participants.

Additional Terms to Know

Apart from these terms, there are a few additional terms that you should know of, which are:

• Floor Price: This is the lowest price at which shares can be bid for in an IPO. It sets the minimum price band. 

• Issue Price: It is the finalized price per share at which all successful IPO applicants are allotted shares after the book building closes.

• Cut-Off Price: It is the lowest price at which retail investors are allotted shares. Any excess bid is refunded to the investor. 

• Offer Date: It is the specific day when an IPO is made available for investors to start submitting their bids.

• Listing Date: This is the date on which the company's shares are officially listed and begin trading on a stock exchange.

Conclusion

Investing in IPOs offers a unique opportunity for beginners to enter the stock market. Understanding these essential terms allows you to make the right investment decision. 

If you're ready to participate in an IPO and explore the potential of these investments, open demat account online today. This will prepare you to take advantage of upcoming opportunities in the dynamic IPO market, positioning you for potential success as a savvy investor.