We already learned that what is an IPO and how the IPO price is determined. Now it’s time to learn - how to apply for an IPO stock. So let’s begin with the topic to find the answer of: How to buy IPO Stock? How to Apply for IPO Online?. In short, Initial Public Offering (IPO) is the process by which private companies become public companies and raise funds from the market by offering company shares.
To buy an IPO as an investor, you must understand the process of how to buy IPO shares and how you can apply for IPO through Online and Offline channels.
New Offer vs Follow-On Offer vs Offer-For-Sale:
Confused? Don’t be, we will explain.
Though IPO is typically used by new companies, in some cases this IPO market is also utilized by old public companies as well for raising funds.
New Offer: If a company is raising funds from the IPO market and getting the stock listed in exchanges for the first time, then it is called as a New Offer. The new offer leads to a new stock exchange listing and helps in the expansion of the capital base of the company. 95% of IPOs are released as New Offer.
Follow-On Offer: Here the company is already listed on the stock exchange but is considering the IPO market for raising additional funds by offering additional shares of the company.
Offer-For-Sale: Here the existing promoters of the company sell off part of their holdings through an IPO. Majority of the disinvestments undertaken by the government are done as Offer For Sale. In an Offer-For-Sale, the total share capital of the company does not change but it is typically used as a means of changing the ownership pattern.
You need to first know the offer type. As a successful investment decision in case of the New Offer requires a lot of research and effort to be spent before investing. While in case of Follow-On offers you can check the growth history of the company in the live market using any stock charting tools like Google Finance, Yahoo Finance etc. In case of Offer-For-Sale also, you can check the trend of that stock in the live stock-chart as the company is already listed on the stock market. But additional research needs to be done as to know why the promoters are leaving the company shares. Be sure to check latest news and publication about the company before investing in OFS.
Who is eligible to invest in an IPO?
Technically speaking, any adult (18+) who is qualified to enter into a legal contract is eligible to buy or apply for the IPO stocks. Of course, it is essential to have a Bank Account, a Demat Account (Brokerage Account in case of USA) and a Tax Identification Number (e.g.- PAN card in India). Remember, a trading account is not necessary to buy IPOs, but if you want to sell those shares on stock exchange then the trading account will be required. That's why it is advised to open a trading account along with the demat account before applying for an IPO for the firsts time.
Another important thing to keep in mind, that when you apply for an IPO it is not a final offer but an invitation to offer. Only if the IPO issuer allots shares to you then it is considered as an offer and then money is debited from your account, hence receiving IPO shares are not 100% confirmed after applying.
How to Apply for an IPO Online / Offline? - The Process Explained:
Below list everything you need to know when you prepare to buy IPO of a company. There are two important questions that are addressed here: How to apply for IPO online and what is the IPO application process?
- IPO can be applied typically through full-service brokers and banks; generally, discount brokers don't provide facility to apply IPOs. But be sure to check with your broker for their service offering. See our guide on how to select the best stock broker.
- IPOs are offered in two varieties: Fixed Price IPOs and Book Built IPOs. In a fixed price IPO Issue, the company fixes the IPO price in advance and announced on the day 1 of releasing offer. You can apply for these IPOs at that price only. In a Book Built IPO issue, the company will provide a price range bracket for the IPO and you have to bid your own price within the bracket. The final price of the IPO and allotment details would be announced after the closing of IPO application. [Read More: How is The IPO Price Determined?]
- IPOs have 3 classes of investors namely Retail, HNI (High Networth Individual), and Institutional investors. Investments up to Rs.2 lakhs in an IPO are categorized as retail investors and have the highest chances for allotment of the IPO shares. In case of HNIs, the allotment is proportionate to the number of applications while in case of institution category the allotment is discretionary.
- You can bid for IPOs either through the offline process or through the online process. In the offline process, physical application form has to be filled up and submitted to the IPO banker or to your broker. In an online application process, you can full up the form by log into the application or trading interface provided by your broker. The advantage in the online IPO process is that most of your account related data is automatically populated from your trading / demat account thus requires less time and effort. That's why the IPO online application method is preferred by the majority of the professional investors.
- One thing to remember that if you apply for IPO, the money required to receive the IPO shares should be present in your bank account. This is required for processing of IPO application.
- In India, SEBI has started a facility named ASBA (Applications Supported by Blocked Amounts) for applying IPO. In ASBA, you don’t have to issue any cheque or pay any money for the IPO till the shares are actually allotted. The amount to the extent of your application is temporarily blocked from withdrawal to your bank account and on the allotment day, if the shares are allotted, the amount will be debited based on the actual number of shares that are allotted. That means if you had applied for shares worth Rs.1 lakh and you got an allotment for only Rs.50000, then only Rs.50000 gets debited to your account and the block on the remaining amount would be removed.
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