What is the Initial public offering?
If a company files for an IPO, it means that it is offering a few of its shares to the general public like you and me to buy.
A share is a unit that represents part ownership in a company. Suppose you and I own the shares of a company and if that company does well in the future and as a result, its share prices also increase, then you will make money without doing a simple job.
Now the reason why everybody is talking about IPOs is that our government has decided that it will offer shares of many famous companies like SBI Cards to the general public.
So, in this situation almost every time people go crazy buying shares of such big companies. Hoping that one day they will surely make profits, and it is true. The maximum time it does happen that the general public earns way more money than they even thought.
And we the public think that if we get those shares, then it will make us a lot of money. and we are not wrong because sometimes the investors get more than double the money they have invested.
And generally, they have their money doubled in just one day, so if you also want to make money like that, you need to understand Eight main things that happened during an IPO:
1) The company that is going for an IPO will use TV, newspapers, different media platforms like websites, etc. to make the people know what they are offering. and that is why within just a few days, IPO news became so popular among every citizen.
2) Especially those who are interested in trading for the share market, it is mandatory for them that they will keep an eye on this type of news.
3) Now, the company that is planning to file for its IPO also decides its price at which they will sell their shares. For example, between rupees 100 to Rs 130 and give it to the public.
4) Now, the public will decide at what price they will bid for that share, is fair, and places a bid. According to the latest news, the SBI Cards price band was between 752 – 755 rupees.
5) The three days of duration will be given to the people to bid for the shares. And people can bid for these shares within a price range provided by a company. Like the SBI Cards booking window was declared between March 2nd to March 5th, 2020.
6) When the bidding time gets closed, and the cut-off price/ the final price gets decided. Which is usually the ideal price at which the company motto will get fulfilled. And the shares get allotted.
7) And finally, is the listing day when the company becomes a part of the stock exchange. And it is open for people to trade. Now I know that you are already planning to buy your first stock but remember that investment in the securities market is subject to market risk.
8) So, this is my request to you all to kindly do your research before you buy a share of a company or place a bid on its IPO. Do not listen to anyone you need to study on your own.
How to Apply for IPO?
Now before starting with, how to apply for IPO? I would like to tell you that there are two methods by which you can use for an IPO. That is:
- Offline method
- Online method.
I will explain the online mode that is immensely popular nowadays, and almost 70% of people use this method. This is one of the safest and easiest ways, that is why many investors follow this method.
And as you are new to this stock market, I believe you should always follow this simplest way so that you do not have to worry for a single second on this entire journey of trading.
We know that it is your hard-earned money that is why we all believe we should choose a path that will be safe for your future and will be the best way to secure your valuable savings.
Before telling you about the online method of applying for an IPO, I should start with usually how we save our money? We know that by opening savings account in any bank. And while doing so, we feel that in that account, my money will be safe, and I keep that if I want.
It is also suitable for shares to keep a stock, we had to open an account which we called a Demat account. Without a Demat account, it is impossible to apply for IPO or to invest in the share market.
Now a question comes on how to open a Demat account in India, the Demat account is managed by depositories. There are two depositories in India. That is NSDL & CDSL. Who opens and maintains the Demat account?
Now for opening a Demat account, you can contact any broker. After opening the account, the broker will provide you with a CMR file. The full form is the client master file.
Please keep in mind that the CMR file is especially important, and the broker you are contacting should provide you with this file because this file consists of much valuable information that will help you while applying for an IPO.
CMR File Consists of Three Essential things:
- Your depository names. It can be either in NSDL/ CDSL.
- Demat account number
- Your DP ID
- Account ID
Now after getting this information, the next important thing which comes is how to apply for an IPO. For that, you need to open net banking. You can open the net banking with any bank like ICICI, HDFC, Axis Bank, Karnataka Bank, etc. It can be any private bank which has the facility to apply for an IPO.
Now the next point is after opening your net banking, and you will find the option for OPEN IPO. You need to click on that option. After clicking on that OPEN IPO option, you will get a list of current company lists.
There you will find another list. That is the category list:
- Qualified institutional buyers
- Non-institutional investors
- Retail investors
Investors like you and I fall under the retail investor category. So, from there, you need to select your classification. So, from here, it will not be tough anymore; you just need to fill up a form.
The Form Consists of mainly a Few crucial things:
- Number of shares that you would buy /How many lots you want to buy
- The price you wish to BID for.
- Click on Register for ASBA
- Fill up your Depository detail
- DP ID
- Account ID
Please keep in mind that whenever you are buying, and I feel you provide the correct information, otherwise you will not receive your shares on your Demat account.
It is not necessary that every time you pay for an IPO, you will receive the share. Sometime due to oversubscription, we do not receive our desired number of shares; we might get shares, or we might not.
One thing I want to assure you all, even if you have paid for a share, but you have not received that, do not worry. Your amount will get back into your account within ten days.
Buying an IPO is one of the most natural things. You were starting from creating a Demat account to contact your broker and lastly paying for it. All the steps are amazingly smooth. You just must have patience and must fill up all your information very carefully.
Investors will get a mail confirmation after buying an IPO. The application will be mentioned in that mail for future communication. Also, in status inquiry, you can find every detail that you need—the size of your lot, the amount that you paid, the company name, etc.
For the offline method, you should have a bank account, enough money to apply for an IPO. Because without money, you cannot buy the shares that are allocated for the retail investors by a company.
The next thing which you must have is a pan card. and the last obvious thing is a Demat account. No matter how you are applying online or offline? A Demat account is necessary for buying an IPO.
Now the next step would be you have to go to the nearest branch of the bank in which you have the account. You need to fill the IPO application form. So, you can get the IPO application form from the bank only.
Or else you can download the form from the NSE website. Fill the form very carefully and clearly. The information you need to have are the applicant name, pan, Demat, lot size, bidding price, etc.
Once you submit the form to the bank, we will get an acknowledgment number and the receipt from the bank. Now keep enough in your account.
Cheque or cash are not accepted while buying a share. Once your payment is made, the amount that you have paid for will be blocked from your account.
Once you are allotted with your share, then the money will be deducted from your account; otherwise, it will be unblocked or refunded. as same as the online method.
How to Bid for an IPO?
Let us now quickly look into how to go ahead and bid for an IPO.
How to Bid for an IPO Online?
This is where the demat and the bank account which is registered in your name, come into play. Apply online through the broker or the bank.
Every online platform has a separate page, listing all the IPOs.
Once you have entered the page, choose which issues you would want to buy. A trader can choose to buy at the cut off price (remember, only retail investors are allowed to invest at cut off prices) or go ahead and make a bid.
Once you have done that, enter the number of shares you would want to buy.
If you are bidding, then the bid price has to be entered along with the number of shares.
Pertinent to know that one can make a maximum of three bids.
After the application is submitted, details pertaining to the IPO and the application transaction are sent to you. It is important to have the requisite funds in the said account.
What is the Bidding Price?
It is the price at which you will bid.
It is important to know certain basics regarding the Bidding Price.
A trader should always bid at a higher price than the suggested cut off price. So for example, if the price range is INR 95 to 110 and you bid at 97 there is a possibility that you will end up with no shares if the cut off price comes in at INR 100.
It is more evident if the share is oversubscribed. One confusion that may arise out of choosing a book building IPO, that they do have a fixed price.
In such cases, the price difference of the application and the cap price is refunded after the allotment.
For retail investors, the limit for subscription is INR 2,00,000.
If one subscribes more than that, the individual will be considered as an HNI. The disadvantage here is that an HNI is allotted far lesser share of stocks than retail investors.
ASBA is another channel one can use for bidding. Banks provide this facility to Investors.
In this process, the application amount is blocked and once the shares are allocated, debited. During such period, the interest gets paid, as usual, on the blocked amount.
The advantage one gets by bidding through ASBA is that at any point before allocation, the bid can be withdrawn or revised by forwarding an application to the bank.
A single bank account supports up to 5 IPO applications.
Not all bank branches support ASBA.
Tips and Tricks of How to Bid for an IPO
This is a three-step process:
1. The Form
Fill the IPO application form correctly. This is a must. Now to many, this advice may seem frivolous, but it is important. The application form needs to be complete from every angle.
- Name of the applicant
- The PAN number of the applicant
- The DEMAT account number of the applicant
- Bid quantity that the trader would want to buy
- Bid price the trade would want to bid at
- Banking branch by giving a standing instruction to block the amount in their account
The applicant needs to ensure that the name mentioned in the application for the IPO is the same that appears in their documents, namely PAN, DEMAT and the account number.
An online application is much simpler though. From January 2016, SEBI had made ASBA mandatory for the subscription of IPO.
2. The Upper Band
All book building IPOs comes with a price band. It is important to bid on the upper band.
The logic is simple. The cut off price is generally towards the higher price. Those who do the mistake of bidding towards the lower price, thinking of saving money, lose out.
Past records indicate that the cut off price is towards the upper band.
Moreover, if the cut off price comes below the higher band, the chances of allotment increase exponentially. For retail investors, any price within the price band is allowed, including the cut off price.
The quantity is important since a maximum of 5 applications per bank account is allowed by SEBI. For retail investors, the maximum amount allowed to subscribe is INR 2,00,000.
Another tip that comes handy is biding in the minimum sizes. Hence if the lot size is 400, bid for 400 or many be a bit higher than that but not more. Furthermore, it needs to be ensured that the total application value is within INR 2,00,000.
A lottery is done in the case of allotment for retail investors for issues which are oversubscribed.
The investors get to bid for a minimum of one lot. The investor has an advantage if he or she gets to bid in smaller lots but for a higher number of applications.
All the information that I have provided in this article will be hugely beneficial for you if you follow it thoroughly. But I would like to advise all my investors to conduct their independent research into every stock or every company detail before making the purchasing decision.
Because investing money on anything involves different risks. You should have much more knowledge and experience in the share market. and once you gain expertise, everything will be as transparent as water to you.
Read newspapers, talk to other investors, visit different company websites, then only you will be an expert in the share market you should have a piece of vast knowledge to be a top investor. and want to become and the top investor, then no one can touch you will reach to a state that you cannot imagine.
The tips and tricks to bidding for an IPO have been mentioned in the article. However, what also needs to be kept in mind is that research and studying the market also carries its own weight.
The Grey market rumours are also a relevant area which should be taken into account. Traders and investors of myriad hues throng the closed market for a better understanding of stocks and their trends.
As a trader, it therefore important to explore every possible source of information before embarking on bidding for IPOs. Remember, a market is always a volatile place to trade-in and limited risk is always present.