As we already know IPO stands for Initial public offering. But do you know the Benefits of IPO to investors ?
There are majorly two types of IPOs
- A Fixed-price
- A book building
Let us go through both of them properly!
- Retail Individual Investors (RII)
- Non-institutional bidders (NII)
- Qualified Institutional Bidders (QIB)
- Foreign Institutional Investors (FII)
- Anchor Investor
Benefits of investing in an IPO
Benefits of IPO to investors
In this type of IPO, the company decides on a fixed price which it is offering to the public investors. The potential investors are aware of the share price before the company decides to go public.
To participate in this type of IPO, the investor must pay the full price of the share when applying for it.
2. Book Building Offering
Book building IPOs hold an auction for the shares among the public after giving them a 20% price band.
A price band is a value setting modus operandi which gives the investor an idea about the upper and lower cost limit within which the buyers are supposed to place the bid.
Investors bid on the shares and the final price is decided after the auction is over.
Unlike in the case with a fixed price, there is no fixed amount for every share. The least amount of the bed is known as a floor price whereas is the highest bid is known as the cap price.
The final price of the share will be calculated after the bidding is over.
Classes of investors in IPO
IPOs have always attracted a large number of investors as it is a Win-Win situation for both investors and companies.
There are many classes of investors that get a good chunk of the shares before it is released in the stock market.
1. Retail Individual Investors (RII)
Resident Indians non-resident Indians, as well as HUFs, invest in this because this category allows bidding at the cutoff price which results in at least 35% of the total offer into RII’s hands. The maximum sum that can be invested in this category is 2 lacs.
2. Non-institutional bidders (NII)
This category is open to all retail category investors who wish to bid more than 2 lacs. This group receives 15% of the total offer. However, this category is not allowed to bid at the cut-off limit. Regardless, they have the option to withdraw their bids before the day of allotment.
3. Qualified Institutional Bidders QIB)
All the investors which fall under this group must necessarily be registered with the SEBI before applying. A limit of 50 % of the bid gets reserved for QIBs and they also are not allowed to bid at the cut-off price. Moreover, they are not allowed to withdraw their offers after the closing of the IPO.
This umbrella covers all the public financial institutions, commercial banks, foreign portfolio investors, mutual funds, and other similar entities.
4. Foreign Institutional Investors (FII)
All foreign entities who are interested in investing in companies from emerging economies such as India are classified into this group. They are all citizens of a foreign country and wish to invest in us.
5. Anchor Investor
60% of the qualified institutional investors may be allocated to anchor investors. This group includes the QIBs who wish to invest 10 crores or more than that into the company. The price equation for the anchor investors gets set separately anchor investors need to invest the least amount of 10 crores and close relatives, immediate blood relations, promoters, and merchant bankers are not eligible. Hence, they cannot bid at the cutoff price.
Benefits of investing in an IPO
- IPOs allow you to get in early if you are stepping into an unexplored market. It gives you more experience as well as death about the business.
- They are often sold at the cheapest price and some may even offer discounted rates during the initial public offering.
- If one happens to miss out on this window, it would be very hard to buy it once the price in the stock market skyrockets.
- These are essentially equity investments. Thus, they are bound to have astronomical returns over time.
- The Corpus fund accumulated over time might help you achieve your long-term goals such as early retirement or investing in real estate.
- The price per equity is transparently mentioned in the IPO document. Thus, you have access to the same information as the bigger investors.
- The same scenario is bound to take charge in the post IPO period. Dash are prices of the stock would give fluctuate according to the whims of the market and what the best broker can offer.
In India each day the number of entrepreneurs and companies is rising rapidly which provides solutions to major problems.
These companies have groundbreaking potential and thus it is always wise to keep an eye out for the initial public offerings of such hidden gems.
IPOs one of the best investment instruments available in the market today.
We hope you manage to reap the benefits!