Investing in IPOs (Initial Public Offerings) is a popular way to invest in the stock market. With IPOs, companies offer their shares to the public for the first time, potentially providing a lucrative opportunity for investors to buy shares at a lower price before they go up. However, getting an allotment of the shares in the IPO is not a given, and investors need to understand how IPO allotment works to increase their chances of success.
How IPO Allotment Works:
The allocation of shares in an IPO is not an automatic process. Rather, it is determined through a process called “proportional allotment”. Here’s how it works:
1. Investor Applications
Before an IPO is listed, the company offers shares to the public through an application process. Investors fill out an application form, providing details such as their name, PAN Card number, address, and the number of shares they wish to apply for. The application can be filled out online or offline, and the minimum investment amount is INR 10,000.
2. Evaluation of Applications
Once the application period is over, the process of evaluating those applications begins. The scrutiny largely consists of reviewing the application form and verifying the same in case there is any suspicion of information falsification. The process of application evaluation may take around a week after the IPO closes.
3. Proportional Allotment
After the evaluation process, the shares are allotted based on the proportional allotment method. – Based on the size of the application and the number of shares in the IPO, the company first allots a certain number of shares to each investor, after which any remaining shares are divided proportionally.
For example, suppose the total number of shares available for an IPO is 100,000, and there are 50,000 applications with a total demand of 500,000 shares. In this case, each applicant would receive an allotment of two shares. After the allotment of two shares to everyone who applied, the remaining 50,000 shares would be distributed proportionally to each investor, based on the amount of shares applied for.
4. Refunds
If the number of shares applied for by the investors is less than the total number of shares available from the company in the IPO, a refund will be issued for the remaining amount.
Tips to increase your chances of success:
Now that you understand how IPO allotment works, there are a few tips that can help you increase your chances of success:
- Apply for minimum shares: Applying for a minimal number of shares would help in case of oversubscription. It would increase your probability of getting the shares as compared to the situation where you applied for the maximum shares. It also helps to avoid unnecessary risk and reduces remuneration failures in case of any problems with refunds.
- Bid at Cut-Off Price: In a book-building process, every investor places a bid at a price higher than the floor price. The final issue price is determined by the company based on the demand and the allotment price is fixed at the bid price. By choosing a cut-off price, the investor will be allotted shares at the final price, which is usually the lowest of all the bids received. Applying at the individual investor rate would increase the probability of an order being filled and also reduce the risk.
- Diversify your portfolio: A diversified portfolio with exposure to different sectors can help mitigate risk and maximize profits. While investing in IPOs, investors should also take into consideration the companies’ background, financials, management structure, and market conditions. One should ensure that the investment amount does not represent a significant chunk of their total investments.
- Keep an eye on IPO listings: Investors should monitor the stock performance of companies after they go public. Knowing the company’s long-term growth potential, earnings, and revenue growth can provide valuable insights and help investors make informed decisions.
Final Words:
Investing in IPOs can be a lucrative opportunity for investors to generate wealth in a relatively short time. However, one should also consider the associated risks of trading in the stock market and new company stocks before investing. It is also wise to consult with financial experts to obtain a thorough understanding of the market. By following the above tips on how IPO allotment works, investors can maximize their chances of success while minimizing the risk. Educational articles like this one are solely for informational purposes and do not constitute investment advice or any other professional advice. Investors must assess and weigh the pros and cons of investing in such markets and be aware of the potential losses that could be incurred in the process.