How to Invest in IPOs: A Step-by-Step Guide

Investments in Initial Public Offerings (IPOs) present the opportunity to buy stocks directly from promising companies before their listing in the stock market. Most investors miss these opportunities, thinking the application process is complicated and the evaluation unclear.

Taking time to understand IPO investment can turn this challenge into an advantage. With correct knowledge of company research, application processes, and pricing, you can easily invest in future IPOs.

In this blog, we’ll simplify the IPO investment process into clear, actionable steps. This will help you to make the right decisions about current IPO offerings and benefit from early-stage investments.

What an IPO Is and How It Works

When entering the field of IPO investments, you should understand the basics. This section explains what IPOs are, the types of IPOs, and how they impact your journey as an investor.

• Definition of an IPO

An IPO is the very first time a private company offers its shares to the public. Companies use this as an opportunity to raise huge amounts of capital to either clear debt or for new projects.

For example, when Deliveroo launched its IPO in 2021, it intended to raise money for the expansion of its food delivery business globally. Another reason was to develop its customer service technology.

• Types of IPOs

Fixed-price IPOs determine a set price per share before the offering even begins. You will know exactly how much you are paying for every share.

Book-building IPOs determine the final price based on investor demand. A company will give a range of prices, and institutional investors will place their bids within this range.

• Benefits and Risks of IPO Investing

Investing in an upcoming IPO can lead to good returns if the company performs well. For example, Wise IPO investors bought shares listed in 2021 for $11.04^[1]. After three months, it skyrocketed to $15.87, resulting in an ROI of 43.75%.

However, some IPOs also fail. New companies usually experience post-IPO volatility and may also be overvalued in the beginning. For instance, Aston Martin's IPO shares fell sharply after listing, so proper research before the allotment of IPOs is essential.

Researching Companies Before Investing in an IPO

We just looked at the importance of research before investing in an IPO through Aston Martin's example. This section will lead you through assessing market dynamics and business fundamentals for better decisions.

• Understanding the Prospectus

The red herring prospectus is your primary research document for upcoming IPOs. It gives potential investors details on financial health, revenues, profits, and debts. It also talks about risk factors, including regulation challenges or any other market-related volatility.

The document also highlights the company’s fund utilisation plan and shows how the funds generated by the IPO will be utilised for expansion or debt repayment. It also provides a shareholding pattern, showcasing promoters' stakes and institutional investors' interests.

• Analysing Industry and Market Trends

Observe the market share and unique selling proposition of the companies. Also, check if the latest IPO aligns with sector growth. For instance, whenever emission control gets stricter for automakers, it can impact profitability.

Technological changes, such as the growth of electric vehicles, can impact traditional models. Shifting consumer preferences, like increased focus on health and sustainability, can also cause changes in demand.

• Understanding Company Fundamentals

Analyse the company's financial performance over the past few years. Look at consistent revenue growth and expanding profit margins. Compare key ratios like the debt-to-equity ratio with industry benchmarks.

Assess the management team's background and the company's track record. A founder with prior IPO experience or a CEO with a rich industry network will navigate a going public process more effectively.

5 Steps to Apply for an IPO: Account Setup and Documentation

Before investing in IPOs, you must have the proper accounts and documentation in place. Here are some steps to make the IPO application process smooth and easy.

Step 1: Setting Up a Demat and Trading Account

A Demat account serves as your digital security vault to hold IPO shares. Most brokers offer a 3-in-1 account, combining a Demat account with a trading and bank account.

Link your bank account so funds can be transferred instantly for IPO allotment. Major banks like HDFC and ICICI complete this setup within 48 hours after their verification process.

Step 2: KYC and Documentation

Prepare your PAN card, address proof, and bank statements for KYC. These documents confirm your identity and eligibility to invest. Scan clear, coloured images of these documents through your chosen platform.

In some countries, like India, an In-Person Verification (IPV) process is required if your application amount exceeds a certain threshold.

Step 3: Choosing the Right Broker or Platform

Select the brokers with reasonable fees and practical features in their IPO application. Leading platforms will provide IPO tracking, instant allotment status, and research reports.

Compare the features like 'UPI-based payments' of Zerodha or the 'change your bid and quantity for upcoming IPOs' option of Upstox.

Step 4: Exploring the ASBA Facility

ASBA (Application Supported by Blocked Amount) blocks your bid amount instead of immediately deducting the amount. Submit your application through net banking or UPI. Make sure to choose a valid category (Retail/HNI).

The latest applications for IPO Let you revise the bid price and amount until the issue-closure date.

Step 5: Submitting the IPO Application

Fill in all your personal details, investment category, and the number of shares applied for. Verify your UPI ID or bank details to avoid application rejections.

Check your IPO allotment status through your broker's platform or the stock exchange website. Most applications are processed within 6 working days from the issue closing date.

Evaluating IPO Pricing and Allocation Process

Price determination and share distribution are important factors that determine the success of an IPO investment. This section shows how IPO prices are set, who can invest, and what happens during share allocation.

• Understanding IPO Pricing

Investment banks and underwriters set IPO price bands based on a company's valuation, conditions in the market, and growth prospects. They check for factors such as growth in revenue and profit margins.

For example, an e-commerce company's IPO price usually reflects the gross merchandise value and the market penetration. In the end, it relies on the demand during the bidding period.

• Application Types

IPO applications are categorised into four types:

1. Retail Individual Investors (RII): Can invest up to ₹200,000, with 35% reservation in latest IPO offerings
2. High Net Worth Individuals (HNI): Investments above ₹200,000, with a 15% allocation quota
3. Qualified Institutional Buyers (QIB): Banks and mutual funds commanding 50% of IPO shares
4. Non-Institutional Investors (NII): Companies and trusts sharing the HNI quota

• Allotment and Listing Process

In case the number of applications exceeds the available shares, the IPO allotment follows a lottery system. For example, an IPO of 1 million shares attracts applications of 10 million shares. This makes it oversubscribed, and your chances of getting allotted decrease.

Shares, after allotment, are listed on stock exchanges within six working days. Grey market premiums before listing might indicate potential listing gains, but these are not guaranteed predictors.

How GrowthJockey Can Support Your IPO Investment Strategy

To invest successfully in IPOs, businesses need to do proper research, look for accurate timing, and make smart decisions. GrowthJockey makes this process simple by providing expert insights with services related to the banking and fintech industries.

We monitor the necessary performance metrics, analyse company fundamentals, and inform you about the latest investment opportunities.

With GrowthJockey, you can evaluate your finances better and make a strong investment portfolio. Contact GrowthJockey today and start making smart, efficient, data-driven investment decisions.

FAQs

1. How do beginners invest in an IPO?

Start by opening a Demat account and completing your KYC. Research upcoming IPOs using the company's prospectus. Set aside funds in your linked bank account. Apply through your trading platform or bank's website during the IPO subscription period. Monitor your application status and track IPO allotment results.

2. What are the 7 steps to getting an IPO?

Here are the seven steps to get an IPO:

1. Create demat and trading accounts.
2. Link your bank account and UPI.
3. Research current IPO offerings.
4. Read the red herring prospectus.
5. Choose your investment category (Retail/HNI).
6. Place your bid within the price band.
7. Wait for IPO allotment confirmation.

3. What are the basic steps in an IPO?

Following are the basic steps in an IPO:

1. Check company fundamentals and financials.
2. Review the latest IPO subscription dates.
3. Calculate the investment amount within your budget.
4. Select the number of shares to apply for.
5. Submit the application through ASBA.
6. Track application status online

4. What are the steps to apply for an IPO?

Below are the steps to apply for an IPO:

1. Verify if your KYC status is active.
2. Ensure sufficient bank balance for the IPO allotment.
3. Choose between online or offline application.
4. Fill in your IPO application form accurately.
5. Confirm UPI mandate or ASBA block.
6. Monitor your application's progress.

5. Is IPO risk-free?

No, IPO investments are not risk-free. Latest IPO listings can face high price volatility. New companies might underperform post-listing, leading to significant losses. Market conditions, company performance, and industry challenges affect share prices. Always research thoroughly and invest only what you can afford to risk.

6. Can I sell IPO immediately?

Yes, you can sell IPO shares on the listing day itself if you've received the allotment. However, many current IPO investments show better returns over time. If the listing price is below the IPO price, immediate selling might result in losses. Consider your investment goals before making this decision.

1. shares listed in 2021 for $11.04 - Link ↑