What is an IPO. illustration showing investors, stock market growth, and a company going public in India

If you follow stock market news, you must have come across the term IPO several times. When big companies like Zomato, Paytm, or LIC announced their IPOs, the entire finance world started buzzing. But what exactly is an IPO, why do companies go public, and how can you as an investor benefit from it?

In this detailed guide, we’ll break down everything you need to know about IPOs — meaning, process, benefits, risks, and how to invest. By the end of this article, you will have a complete understanding of IPOs and whether they are right for your investment portfolio.

What is an IPO?

IPO stands for Initial Public Offering.
It is the process by which a private company offers its shares to the general public for the first time, thereby becoming a publicly listed company on a stock exchange like NSE (National Stock Exchange) or BSE (Bombay Stock Exchange).

In simple words, an IPO is like a company’s big debut in the stock market. Before the IPO, the company’s shares are owned only by a few people (founders, promoters, and early investors). After the IPO, anyone — including you and me — can buy and sell its shares in the open market.

Why Do Companies Launch IPOs?

There are multiple reasons why a company decides to go public:

  1. Raise Capital for Growth
    Companies need money for expansion, research, marketing, or paying off debts. IPO gives them access to large-scale funding from the public.
  2. Liquidity for Early Investors
    Founders, angel investors, and venture capitalists who invested early in the company can sell part of their stake and book profits.
  3. Brand Visibility & Credibility
    Being listed on a stock exchange enhances the company’s reputation and brings more trust from customers and partners.
  4. Mergers & Acquisitions
    Publicly traded shares can be used as currency for acquiring other companies.

Types of IPOs

In India, companies usually issue IPOs in two ways:

  1. Fixed Price IPO
    • The company decides a fixed price for its shares.
    • Investors apply at this fixed price.
    • Example: If the price is set at ₹500 per share, you pay ₹500 × number of shares.
  2. Book Building IPO
    • A price range (say ₹500–₹550) is announced.
    • Investors place bids within this range.
    • The final price (called Cut-off Price) is decided based on demand.

Key Terms You Must Know Before Applying for an IPO

When you read IPO news, you often see terms like lot size, oversubscription, grey market premium (GMP), etc. Let’s simplify them:

  • Lot Size – The minimum number of shares you need to apply. For example, if the lot size is 50 shares, you cannot apply for less than 50.
  • Issue Price – The price at which shares are offered in the IPO.
  • Cut-off Price – The final price decided in a book-building process.
  • Oversubscription – When demand for shares is higher than the supply. For example, if an IPO is oversubscribed 10 times, only a small percentage of applicants will get shares.
  • Allotment – The process of distributing shares to applicants. If you don’t get allotted, your money is refunded.
  • Listing – The date when the company’s shares start trading on NSE/BSE.

The IPO Process in India

The journey of an IPO involves several steps:

  1. Hiring Investment Bankers (Underwriters)
    Companies appoint investment banks to manage the IPO process.
  2. Filing with SEBI
    Draft Red Herring Prospectus (DRHP) is filed with SEBI, containing details about the company, finances, risks, and objectives.
  3. Approval & Roadshows
    SEBI reviews and approves. Then, the company promotes the IPO to potential investors.
  4. Pricing & Application
    The price band is decided and retail investors can apply through their demat account using UPI or ASBA.
  5. Allotment of Shares
    Based on demand and availability, shares are allotted.
  6. Listing on Stock Exchange
    Finally, the company’s shares get listed, and trading begins.

Benefits of Investing in IPOs

For retail investors, IPOs can be exciting. Here’s why:

  • Early Entry – You get a chance to invest in a growing company at an early stage.
  • Listing Gains – Many IPOs list at a higher price than the issue price, giving investors instant profit.
  • Long-Term Growth – If the company grows, the value of your shares can multiply over the years (Example: Infosys, TCS).
  • Portfolio Diversification – Adds new sectors and companies to your investment portfolio.

Risks of Investing in IPOs

While IPOs sound lucrative, they are not risk-free.

  • Overvaluation – Some companies set very high prices, making them risky investments.
  • Uncertain Future – Newly listed companies may not always perform well in the long run.
  • Low Allotment Chances – Highly popular IPOs are oversubscribed, reducing your chances of getting shares.
  • Market Volatility – A sudden fall in the stock market can negatively affect IPO performance.

How to Apply for an IPO in India

Here’s a step-by-step guide:

  1. Open a Demat & Trading Account with a broker like Zerodha, Groww, Upstox, or your bank.
  2. Check upcoming IPOs on NSE/BSE or your broker’s app.
  3. Choose the IPO and select bid price (or “cut-off” for maximum chance).
  4. Enter lot size (minimum shares).
  5. Approve payment using UPI mandate or net banking ASBA.
  6. Wait for allotment results.

Examples of Popular IPOs in India

  • Zomato (2021) – Listed at a 53% premium.
  • Paytm (2021) – Listed at a discount, investors lost money.
  • LIC (2022) – India’s largest IPO, but post-listing performance was weak.
  • TCS (2004) – One of the best-performing IPOs in Indian history.

These examples show that IPOs can be both rewarding and risky.

Should You Invest in IPOs?

The decision depends on your investment goals and risk appetite.

  • If you want quick profits, you may target IPOs for listing gains.
  • If you are a long-term investor, focus on companies with strong fundamentals.
  • Always read the DRHP and analyze financials before applying.

IPOs vs FPOs vs Direct Listing

  • IPO (Initial Public Offering) – First time offering shares to the public.
  • FPO (Follow-on Public Offering) – Company issues more shares after IPO.
  • Direct Listing – Company lists shares without raising fresh funds.

Frequently Asked Questions (FAQs)

Q1. Can I sell IPO shares immediately after listing?
Yes, once listed, you can sell anytime on NSE/BSE.

Q2. What is the minimum investment in an IPO?
It depends on lot size. Usually, ₹10,000–₹15,000 minimum.

Q3. How is IPO allotment decided?
If oversubscribed, shares are allotted randomly by lottery in retail category.

Q4. Can I apply for multiple IPOs?
Yes, you can apply for as many IPOs as you like if you have funds.

Q5. Do all IPOs give profits?
No. Some IPOs may list below the issue price. Careful research is important.

Conclusion

An IPO is one of the most exciting events in the stock market. It gives companies the capital to grow and offers investors a chance to participate in their journey. However, IPOs are not a guaranteed way to make money. Some create wealth, while others disappoint.

As an investor, always study the company’s financials, business model, and risks before applying. Remember, investing blindly in IPOs just because of hype can be dangerous.

With proper research and a long-term perspective, IPOs can become a valuable part of your investment strategy.