IPOs — Initial Public Offerings Explained

An IPO (Initial Public Offering) is when a private company offers its shares to the public for the first time and gets 'listed' on a stock exchange like the NSE or BSE. It is the company's debut on the public market stage.

Companies do this for two main reasons: to raise capital for growth (fresh shares, with money going to the company), and/or to let existing shareholders sell part of their stake (an 'Offer for Sale', where money goes to those selling, not the company). Knowing which one an IPO is matters — we will return to it.

An IPO happens in the primary market — where new shares are issued and you buy directly from the company. Once the stock lists and starts trading between investors, all that activity happens in the secondary market — the regular market you see every day.

This distinction matters: in an IPO you apply and may or may not get an allotment; in the secondary market you simply buy available shares at the going price. If you miss an IPO, you can always buy the stock later in the secondary market — often at a calmer, fairer price once the hype fades.

Before an IPO, the company files a detailed document with SEBI called the DRHP (Draft Red Herring Prospectus). It contains the company's financials, business description, risks, and crucially, how it intends to use the IPO money.

You do not need to read all 500 pages, but you should read the 'Risk Factors' section and the 'Objects of the Issue' (use of proceeds). These two sections reveal what could go wrong and where your money is actually going — far more useful than any hype.

An IPO is offered within a price band — a range within which you place your bid (for example, ₹440–₹462). Retail investors usually bid at the 'cut-off price', meaning you agree to pay whatever final price is decided within the band.

You apply in lots. The lot size is the minimum number of shares you must bid for, and your application amount is the lot size multiplied by the upper price band. You can apply for one or more lots up to the retail limit.

GMP (Grey Market Premium) is the unofficial, unregulated price at which an IPO's shares trade in an informal 'grey market' before listing. A GMP of ₹50 on a ₹462 IPO implies the grey market expects it to list around ₹512.

Beginners treat GMP as a guarantee. It is not. The grey market is unofficial, can be manipulated, and frequently turns out to be wrong — strong GMP has preceded weak listings and vice versa. Use it, at most, as a rough sentiment indicator, never as a reason to apply.

You apply for an IPO through your broker or bank using ASBA (Application Supported by Blocked Amount), often via UPI. Your application money is blocked in your bank account — not debited — until allotment. If you get shares, the money is taken; if not, the block is released.

If an IPO is oversubscribed (more applications than shares), the retail category allotment is decided by a lottery. The more oversubscribed it is, the lower your chance of getting even one lot. You either get a full lot or nothing — partial allotment is not typical for retail in heavily oversubscribed issues.

On listing day, the stock starts trading in the secondary market. It can list at a premium (above the IPO price), at par, or at a discount (below). Listing gains are never guaranteed — plenty of hyped IPOs have listed flat or fallen.

Be aware of lock-in periods. Anchor investors (large institutions allotted shares pre-IPO) are typically locked in for a period, and promoters for longer on part of their holding. When these lock-ins expire, a wave of selling can pressure the price — a reason some stocks fall weeks or months after a strong debut.

Replace excitement with a checklist. Before applying, work through five questions honestly. If the answers are weak, it is perfectly fine to skip — there is always another IPO, and the stock will trade in the secondary market anyway.

The biggest IPO risk is behavioural: applying out of FOMO, chasing GMP, and treating listing gains as certain. Many recent IPOs listed at large premiums and then fell sharply over the following months as hype faded and lock-ins expired.

Approach IPOs as you would any investment — with a valuation, a reason, and a limit on how much you commit. Never borrow money to apply for listing gains, and never let a hot grey market override a weak business.