What is an IPO? A Beginner’s Guide to Investing in Initial Public Offerings

Every big company you know today—Infosys, Zomato, LIC, or Paytm—once stood at the doors of the stock market, waiting to step in through an IPO. Many everyday investors made fortunes from early investments, while others learned the tough lessons of market risks.

So, what is an IPO? In simple words, it’s the first time a company offers its shares to the public and lists itself on the stock exchange. But for a beginner, understanding IPOs is not just about knowing the definition—it’s about learning the why, how, benefits, and risks.

In this beginner’s guide, we’ll break down IPOs in the simplest, most practical way—so that you can confidently decide whether or not IPO investing fits into your financial journey.

What is an IPO?

An IPO (Initial Public Offering) is when a privately-owned company sells its shares to the public for the first time through the stock exchange. By doing this, the company transitions from being privately held to becoming a publicly traded company.

This means any retail investor—you, me, or anyone with a Demat account—can buy shares and become part-owners of the company.

Think of it as a grand opening of a new store, where for the first time, the doors are opened to the general public. Similarly, an IPO allows everyone to participate in the company’s growth journey.

Why Do Companies Launch an IPO?

Launching an IPO is a strategic move. Companies don’t go public just for show—they do it to achieve specific goals:

• Raise capital for expansion – Companies need money for new projects, acquisitions, or research. IPOs bring in huge funds from public investors.
• Repay debt – Many firms use IPO proceeds to reduce heavy debt burdens.
• Build credibility and visibility – A listed company enjoys trust, transparency, and brand recognition.
• Reward early investors – Venture capitalists, promoters, and private equity investors often cash out some of their holdings during IPOs.

How Does an IPO Work?

The IPO journey involves several stages:

1. Hire underwriters (investment banks) – Experts like Morgan Stanley, Kotak, or ICICI Securities help structure the IPO.
2. File with SEBI – The Securities and Exchange Board of India (SEBI) checks if the company meets all requirements.
3. Draft Red Herring Prospectus (DRHP) – A detailed document containing company financials, risk factors, and business model.
4. Decide price band – Companies set a minimum and maximum share price range for bidding.
5. Open subscription window – Investors apply through brokers, UPI, or banks.
6. Allotment & listing – After allotment, shares are credited to Demat accounts and then listed on NSE/BSE.

For example, Zomato’s IPO in 2021 was oversubscribed 38 times and created huge market buzz.

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Types of IPO Investors

• Retail Investors – Small investors like us (application limit: ₹2 lakh).
• Institutional Investors – Mutual funds, insurance companies, and FIIs (Foreign Institutional Investors).
• High Net-Worth Individuals (HNIs) – Individuals investing over ₹2 lakh.

Types of IPO Issues

1. Fixed Price Issue – The price of shares is predetermined (e.g., ₹500 per share).
2. Book Building Issue – Investors bid within a price band (e.g., ₹450–₹500). Final price depends on demand.

How to Apply for an IPO in India

Applying for an IPO has become simple with digital tools:

• Through broker’s app – Platforms like Zerodha, Upstox, and Groww allow UPI-based IPO applications.
• ASBA (Application Supported by Blocked Amount) – Available through banks, where money is blocked until allotment.
• Timeline – Application → Allotment → Refund (if not allotted) → Listing on NSE/BSE.

Benefits of Investing in an IPO

1. Early entry into potential market leaders – Buying shares before they become mainstream.
2. Listing gains – Many IPOs open at a higher price than the issue price.
3. Long-term wealth creation – Infosys and TCS shareholders from IPO days still enjoy huge returns.
4. Portfolio diversification – Add new industries or sectors to your investments.

Risks of Investing in an IPO

• Listing losses – Not every IPO lists at a premium. Some open below issue price.
• Market volatility – Economic events and investor sentiment can affect listing.
• No past record – Unlike established stocks, IPOs don’t have long performance history.
• Overhyped valuations – Some companies demand high prices without strong fundamentals.

How to Analyse an IPO Before Investing

Before you apply, check these key points:

• Company fundamentals – Revenue growth, profits, debt levels.
• Industry potential – Is the sector growing? (e.g., EV, tech, renewable energy).
• Promoters’ track record – Strong leadership builds trust.
• Valuation vs peers – Compare P/E ratios with competitors.
• Use of IPO funds – Expansion vs debt repayment.

Famous IPOs in India

• Infosys (1993) – One of India’s most successful IPOs.
• Reliance Power (2008) – Highly hyped, but a big disappointment post-listing.
• Zomato (2021) – Oversubscribed, gave mixed long-term results.
• LIC (2022) – India’s largest IPO, with massive public participation.

Common IPO Myths

• “All IPOs give profit” – Wrong. Many IPOs list at a discount.
• “Only experts can invest” – Retail investors can easily apply.
• “High subscription = guaranteed listing gains” – Not always true.

IPO vs FPO – The Difference

• IPO (Initial Public Offering) – First time a company issues shares to the public.
• FPO (Follow-on Public Offering) – Already listed companies issue more shares to raise additional funds.

Who Should Invest in an IPO?

• Suitable for: Long-term investors with risk appetite, beginners who research before applying.
• Not suitable for: Conservative investors expecting guaranteed short-term profits.

Conclusion – Should You Apply for an IPO?

Now that you know what is an IPO, you can see it’s both an opportunity and a risk. IPOs allow you to become an early shareholder in companies with high growth potential—but they require smart decision-making, research, and patience.

Instead of blindly chasing hype, treat IPOs as just another investment tool in your portfolio. Done right, they can unlock wealth; done wrong, they can cause losses.

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Disclaimer

This article is for educational purposes only. It is not financial advice. Please consult a SEBI-registered investment advisor before making any investment decisions.