Initial Public Offerings

IPO is a term that is very often heard in the financial newspapers regarding companies. But not too many people know what the term means and its implications on investors.

There are two kinds of Public issues that a company can issue to the public- Initial Public offerings and further public offerings. With a public offering, the issuing company makes an offer allowing new investors to enter into its family of shareholders. The issuing company makes detailed disclosures as per the SEBI Disclosure and Investor Protection (DIP) guidelines in its offer document. This is then offered to the public for subscription.

An Initial Public Offering (IPO) is the first sale of an organizations` existing as well as fresh securities to the public. It is the first time that the company is traded on the stock exchange. The IPO is a company’s first sale of stock to the public. The securities offered in an IPO are more often but not always those of young, small companies that are seeking outside equity capital and a public market for their stock.

For a company to float a public issue or IPO, they must print the application forms that investors will fill in. Public issues are generally open for only a few days. By law, they should be open for at least 3 days and a maximum of 21 days. The time period is the same for the issues that are funded by financial institutions. In general, however, most of the issues remain open for 3-4 days.

The application form along with a check or DD must be submitted by the investor before the deadline for the issue. Some IPOs that are by investment companies (closed ended funds) include a fee that represents a ‘load’ for buyers.

When considering the application for any IPO there are several factors that the investor must keep in mind. It is important to know who the Promoters are and their credibility in the market as well as their track record. The past performance of the company that is offering the IPO is also very important to look into.

It is also important to know what the company is involved in – whether it is a manufacturing company or a part of the service sector. If it is a manufacturing company, the investor must take into account the products manufactured by the company.

Along with all of these factors it is absolutely essential to gauge the risks that are involved in investing in the IPO of the company. Investing in IPO’s involves its fair share of risks that are quite large. These risks are however essential to gain large returns.

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