Initial Public Offering (IPO) and types of IPO
Initial Public Offering (IPO) is the process by which companies raise funds from the market. It is the facility by which a private company or corporation can become public through selling a portion of its stake to the investors as equity or shares. The new equity capital to the firm will be infused with IPO. It is also done to raise capital for the future or to monetize the investments made by existing stakeholders.
Once the IPO is done, the shares of the company are listed in the stock exchange and can be traded freely in the open market.
Types of IPO
There are two common types of IPO.
Fixed Price Offering
In the fixed-price offering, the company going public sets a fixed price at which its shares are offered to investors. The investors could understand the share price before the company goes public. The demand for the stocks in the market can be known once the issue is closed.
Book Building Offering
Under book building offering, the company initiating an IPO offers a 20% price band on the stocks to the investors. The interested investors can bid on the shares before the final price is fixed. The investors should specify the number of shares they willing to buy and the amount they are willing to pay per share.
The floor price is the lowest share price and cap price is the highest stock price. investors’ bids determine the ultimate decision regarding the price of the shares.
Eligibility norms required to invest in an IPO
Any individual who is an adult and is capable of entering into a legal contract can serve the eligibility norms to apply in the IPO of a company. However, there are some other inevitable norms an investor needs to meet. The eligibility criteria are:
- It is required that the investor interested in buying a share in an IPO has a PAN card issued by the Income Tax department of the country.
- One also needs to have a valid demat account.
- It is not required to have a trading account, a demat account serves the purpose. However, in case an investor sells the stocks on listings, he will need a trading account.