Ipo.
IPO Explained: Meaning, Benefits, Risks, Pre-IPO, and How to Invest
New Delhi, India | The Market Times – The stock market continues to buzz with Initial Public Offerings (IPOs), drawing attention from retail investors across the country. But what exactly is an IPO, why do companies bring it, what is Pre-IPO, and should retail investors participate? Here’s a complete guide in simple terms.
What is an IPO?
An Initial Public Offering (IPO) is when a private company raises funds by offering its shares to the public for the first time. Until then, companies are usually funded by self-capital, family, friends, angel investors, or venture capital.
But when a company needs large-scale funding — often hundreds or thousands of crores — it can’t always rely on loans, since loans come with heavy interest. Instead, companies launch an IPO to raise money directly from the public.
Once the IPO is completed and shares are allotted, the company gets listed on the stock exchange and becomes a public limited company.
What is Pre-IPO?
A Pre-IPO placement refers to the sale of a company’s shares to select investors before the IPO is launched for the general public.
These investors are typically venture capitalists, private equity firms, HNIs (High Net-worth Individuals), or institutional investors.
Companies offer them shares at a negotiated price, usually lower than the expected IPO issue price, as a way of securing anchor funding and confidence.
Pre-IPO deals often happen 6–12 months before the IPO listing.
Why do companies do Pre-IPO?
To raise initial capital and ensure confidence in the IPO.
To bring in strong institutional investors, which boosts credibility.
To lock in funds early and reduce dependence on uncertain IPO subscriptions.
Can retail investors participate in Pre-IPO?
Normally, retail investors don’t get direct access to Pre-IPO shares, as these are privately placed. However, in recent years, special platforms and unlisted share brokers have emerged, where investors can buy unlisted shares of companies like Reliance Retail, HDB Financial Services, or Ola before they officially come to market.
Risks in Pre-IPO investing:
Liquidity Risk: Unlisted shares are not freely tradable. Selling before listing can be difficult.
Valuation Risk: Prices of unlisted shares may be inflated due to low supply and high demand.
Lock-in Period: SEBI often imposes a 1-year lock-in on Pre-IPO shares for non-retail investors, meaning they cannot sell immediately after listing.
Company Risk: If the IPO gets delayed or cancelled, Pre-IPO investors are stuck with unlisted shares.
Why do companies prefer IPOs over loans?
IPOs are one of the most cost-effective ways to raise capital. Unlike bank loans, IPO funding does not require repayment with interest. Instead, investors who buy shares become shareholders, and their profit or loss depends on how the company performs in the future.
For instance, if even 1 crore investors put in ₹1,000 each, the company instantly raises ₹1,000 crore — without owing interest.
Why do investors apply for IPOs?
For retail investors, IPOs offer the early-mover advantage. Since companies often issue shares at a discounted or “issue price,” there is potential for listing gains — where shares trade higher on the first day of listing.
However, this does not always guarantee profit. Big IPOs like LIC and Paytm listed at lower prices than their issue price, causing losses for early investors. On the other hand, many IPOs have delivered 20–100% listing gains within days.
Key IPO Terminologies Simplified
Issue Price / Offer Price: Price at which shares are offered during IPO.
Bid Price: The price investors choose within the given price band.
Lot Size: Minimum number of shares you must apply for in one lot.
Over-Subscribed IPO: When demand exceeds the number of shares issued. Allotment is then decided by lottery.
Under-Subscribed IPO: When fewer applications are received than the number of shares available. In this case, all applicants usually get allotment.
Listing Gain / Loss: Profit or loss investors make when shares are listed on the stock exchange.
Should you always invest in IPOs?
Not necessarily. While IPOs of strong companies with good fundamentals may generate wealth in the long term, history shows that not all IPOs perform well immediately.
Some companies without profits (like Zomato at the time of its IPO) still come to the market.
Several large IPOs (LIC, Paytm, SBI Cards) initially listed below their issue price, causing short-term losses.
However, many IPOs — especially smaller but high-demand ones — have delivered quick listing gains.
How to apply for an IPO?
Investors need a Demat account with any SEBI-registered broker. Within the broker’s app or website, there is an IPO section where investors can:
- Select the IPO.
- Choose bid price (often the maximum is safer in oversubscribed IPOs).
- Select the number of lots.
- Apply through UPI payment to block funds.
- Wait for allotment results.
If allotted, shares are credited to the Demat account before the listing date.
Final Takeaway
IPO: Best for retail investors seeking listing gains or long-term exposure to new companies.
Pre-IPO: Usually reserved for big investors but slowly opening up for HNIs and select platforms. Higher risk but sometimes higher reward if company lists at a premium.
For everyday investors, IPOs are more transparent and regulated. Pre-IPO investing requires caution, due diligence, and risk appetite.
