Types of IPO

An Initial Public Offer (IPO), a method through which a company can raise funds by issuing its shares to the public, is the most basic step of a company going public and ultimately resulting in available for broader investor participation on the bourses.

IPOs have attracted many new investors and market participants to take a keen interest in the world of investing. IPO provides investors with an excellent opportunity to invest in a company in an earlier stage of its growth cycle.

Companies may opt for IPOs to raise funds for financing new projects, scale the business, or even give a partial or full exit to early investors and promoters. As it is a form of equity financing, it is a cheaper and more affordable way to raise funds. Before investing in an IPO, knowing the different types of IPO is essential.

There are two types of IPO that a company can choose from. Fixed price issues and book-building issues.

Fixed price issue

A fixed price issue is an IPO type in which a company’s shares have a fixed price. A company, with the help of a merchant banker or underwriter, evaluates various factors in order to come up with a fixed price for the issue.

While evaluating a company’s offerings, the merchant bank or underwriter will assess the company's assets, liabilities, risks and valuation. Along with the current valuation, the merchant bank will also try to ascertain the future growth prospects of the company in order to come up with a price for the issue. Typically, these issues are undervalued, and the price is below the market value, making it popular amongst retail investors as they can benefit from the company's revaluation.

Book-building issue

A book-building issue is another type of IPO. This method discovers the price of the shares during the IPO process itself. When the company comes out with the issue, they set a price band or a range instead of a fixed price.

The lowest price of the range is called the ‘floor price’ while the highest point is called the ‘cap price’. While applying for this IPO type, investors can bid for a price in this range. The share price is decided after evaluating all bids. A company may select one or a combination of both from the different types of IPO in order to issue shares to the public.

Here are the key differentiating factors between the two types of IPO.

• Price: In a fixed price issue, the price of the shares is fixed before the issue. In a book-building issue, the exact price of the share is unknown, but investors are given a price band or range within which they can place bids.
• Payment: When an investor applies for a book-building issue, the full amount of the bid needs to be paid. In the case of the shares not being allotted, the funds are credited back to the account of bidder. In a fixed-price issue, the payment needs to be done only after the shares are allotted.
• Demand: In a fixed price issue, there is no method or way in which one can get to know the demand for the IPO. In a book-building issue, the demand for the issue can be known after each day the issue is open.

Applying for IPOs

Now that we’ve discussed the different types of IPO, let’s look at how you can apply for one.

In order to apply for an IPO, an individual needs to have a demat account in which the securities can be stored safely and digitally. A trading account which will help facilitate the buying and selling of securities, and a bank account through which the funds can be used to apply for the IPO.

• The first step in order to apply for an IPO is to create or log in to your account with a broker.
• After logging in, one should navigate to the IPO section where the different IPOs open for subscription are listed.
• After selecting the preferred IPO, an investor can place an order. An investor can select the lot size or the price at which they want to place the bid.
• In the case of a book-building issue, the amount of the bid will be debited from your account after the order is placed. If the shares are not allotted, the funds will be credited back to your account. Alternatively, one can apply for an IPO through a bank’s Application Supported by Blocked Amount (ASBA).
• The IPO is considered to be over when the shares are allotted and listed on the stock exchanges.

In conclusion, IPOs are helpful for companies as it is a cheaper way to raise funds for various needs. Moreover, IPOs provide wonderful opportunities for investors to be a part of a company with a prospect for growth.

FAQs:

How many types of IPO are there?

There are two types of IPOs. Fixed price issues and Book-building issues.

What is the most common type of IPO?

Out of the two types of IPOs, the Book-building issue is a relatively newer type of IPO in India, but it is still widespread.

What type of market is IPO?

An IPO market is a primary market where companies issue shares to the public for the first time. These shares are then traded in the secondary market.

Which IPO is best currently?

There are multiple factors that affect an IPO. All IPOs have their strengths and weaknesses. An investor must do thorough research and analysis before applying for an IPO.