What is an IPO?

These days, you must have come across a lot of advertisements on the internet, television, and full-page ads in newspapers of companies coming out with IPOs. So what are these IPOs? How to invest in them? What are the do’s and don’ts to keep in mind at the time of applying in these IPOs? We will answer all these questions for you in the coming days.

Let us start by understanding the concept of IPO. An Initial Public Offering (IPO) is a process in which a privately held company offers its shares to the public for the first time. The company lists its shares for trading on the stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Through an IPO, a private company becomes a publicly-traded company and its shareholders become a lot more diverse with new investors subscribing to its shares.

When a company comes out with an IPO:

  1. The existing shareholders offer their shares to the public in which case the money goes to the existing shareholders and not the company, or
  2. The company offers new shares to the public in which case the money goes to the company which it can use for its purposes, or
  3. It is a combination of existing shareholders offering their shares along with the company offering new shares

The shares offered by existing shareholders are also known as “Offer for Sale” and the new shares being offered are also known as “Fresh Issue”.