by 5paisa Research Team Last Updated: 2022-10-20T21:38:03+05:30
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An IPO, or initial public offering, is the first time a company's stock is available for purchase by the general public. Investors can make money on stocks that are likely to appreciate over time. There are many reasons to consider investing in an IPO, but risks are also involved. Investors need to be aware of the benefits and risks before making any investment decisions.

Why Must Every Indian Consider Investing in an IPO?

The most significant benefit of IPOs is the public's opportunity to buy shares in a company. That can be attractive for many reasons. For one thing, it can offer the chance to get a foot in the door of a profitable business that otherwise would be closed to you. There is often no cost at all to buy IPO shares.

This is because underwriters are responsible for distributing them, and they do not charge the companies they work with anything for this service (unlike with standard stocks where brokers do charge fees). Another benefit is to access all the information about the company and its industry. IPO buyers have immediate access to all publicly available information about a company and any material non-public information (MNPI).

Finally, there is a time limit on when you can sell your IPO shares. With an average stock offering, you can trade anytime after buying your shares — even if it is months or years later. Institutions purchase securities in an IPO for two reasons. First, they are offered at what appears to be a bargain price because not all assets have been fully valued. Second, investors like the idea of investing in something that is "new" and "hot." A hot new stock can fuel investor enthusiasm and make them feel like they are part of something unique that others will want to buy into as well.

How Can You Reap the Advantages of IPO?

The share market is a popular way to build wealth. Investing in stocks has several advantages - mainly since it is a long-term investment option, you can enjoy steady growth over a while. Besides, you also have an opportunity to earn dividends on your shares.

They are a great way to invest your money as they offer huge returns at a much lower risk than other options. You can buy relatively small stocks and increase your profits substantially if the company does well. In addition, you will get capital appreciation by selling the stock when it reaches a higher market price after listing.

IPO can be traded on the stock exchange like any other marketable instrument. The price at which it gets listed on the exchange determines its premium or discount against its issue price. The premium/discount would be further affected by the market's supply and demand situation. However, this is not something that the issuing company can decide alone.

The IPO process involves issuing fresh shares to raise investors' capital and listing those shares on a stock exchange. Its objective is to get funds required for growth from outside sources and create liquidity for existing investors.


What Are the Benefits of IPO to Investors?

IPO enables companies to raise money even during economic downturns when banks are reluctant to lend money.* It helps companies get listed on major stock exchanges and makes them more attractive to potential investors. It helps increase transparency in business dealings.

Greater Liquidity
Once a company goes public, investors can sell the company's stock on the open market. This allows investors to realize their gains without waiting for their shares to be repurchased. Since a company's shares can be bought or sold at any time, it increases liquidity for investors.

When a company goes public, they trade shares between investors on an exchange. This creates greater diversity among investors, as no one investor ends up with a majority share of the company's outstanding stock. As such, owning the stock of a publicly-traded company provides a form of diversification for investment portfolios.

Greater Capital Markets Access
An initial public offering allows companies to raise capital from institutional investors, which is often unavailable from private sources like venture capitalists or angel investors due to legal and regulatory restrictions under securities laws.

Furthermore, since these exchanges are open markets and are available to many investors through broker/dealers and other financial intermediaries, publicly traded companies have access to capital that may not otherwise be available.

Raise Money
A reason for going public is to raise money for the business. As per SEBI guidelines, a company can use IPO to increase to 20 per cent of its capital from the market. This is a boon for any business looking to expand and do big things.

Increase Brand Equity
Brands are built on trust and credibility. When you make a product or service available for everyone to see, you build consumer confidence in your brand. This leads to better sales and more profits.

Discipline Management
Going public encourages managers to focus on profits over other goals like growth or expansion. It also facilitates communication with shareholders because they cannot hide their problems.

Outsiders Perspective
On going public, a company gets an outside perspective on its business model, marketing strategies, and other aspects that could prevent it from profitability.

Pre-IPO investors can also make money when a company debuts on the stock market, but only if it does well. If the IPO does not do well, these investors could lose money just as quickly as any other investor buying stock directly from a public company.

Wrapping Up

IPOs help companies raise money without seeking funds from banks or financial institutions, which may charge high-interest rates on their loans. It also allows existing investors to sell their stake in the company without incurring capital gains tax.

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