When the company starts earning, it can also reward shareholders in the form of dividends at the appropriate time. If you are confident about the company’s prospects and its management, then it is time for you to get involved with the growth of the company.
If you regularly read newspapers or watch the news, then recently you must have heard the word ‘IPO’ many times. You must have read that investors made very good money from IPOs in 2020. In such a situation, it must have spontaneously come to your mind that what is an IPO and how to invest in it. Actually, IPO means “Initial Public Offering” i.e. ‘Initial Public Offer’. It is the process through which a company offers its shares to the public for the first time by bringing an issue. It can also be a new company, an emerging company or an old company, which decides the listing on the exchange and goes between the public.
Through an IPO, people get a chance to participate in the progress of the company. An IPO gives a company the opportunity to raise resources from people to expand its area of operations and its scale, as any business needs large capital to operate on a large scale.
This money can either be raised as a loan from banks or it can be raised by selling its shares to the people by public issue of the poets. The company has to pay interest regularly on taking a loan from the bank. This increases the static cost of the company. At the same time, there is no recurring cost to raise funds through a public issue. This helps the company to raise its resources without affecting its profitability.
When the company starts earning, it can also reward shareholders in the form of dividends at the appropriate time. If you are confident about the company’s prospects and its management, then it is time for you to get involved with the growth of the company. This will be a time when you can get the shares of the company at a cheaper price.
During an IPO, shares can either be offered at par or offered at a premium relative to its face value. All established companies usually offer their shares at a premium. If the number of shares that are offered, if more number of applications come for the shares, then it is called oversubscription. In such a situation you either get less shares than the application, or you may be deprived of the allotment. If the share price is expected to be much higher than the price band of the IPO, the possibility of share allocation is less.
To apply for an IPO, you must have a demat account, where the allotted shares are credited. Once the shares are listed on the stock exchange and they are also credited to your demat account. You can either sell those shares or if you are confident about the growth of the company, then you can also keep them with you. For any profit received above the issue price, you have to pay tax at the rate dependent on the holding period.
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