The year 2022 has seen a lot of momentum in the IPO (Initial Public Offering) segment. An investor can open a Demat account online and invest in the upcoming IPOs that are all set to draw investors with considerable issue lot sizes and sizable listing gains. Several stock market investors want to invest in these IPOs but fear doing so due to a lack of knowledge. Knowing the IPO-related terms can equip you with the necessary knowledge for IPO investing.
Process To Open Demat Account
To open a demat account online, numerous documents are required. Brokers/depository participants activate your account within 24 to 48 hours after successful document verification with the KYC process.
If you have a demat account, it gives you the following benefits:
- Holding of financial instruments electronically. These instruments comprise stocks, bonds, mutual funds, exchange-traded funds, and government securities.
- Buying and selling of shares online with a quick process.
- Fundamental and technical analysis of market traded securities.
- Fast delivery of funds and securities between traders.
What is an IPO
Before we discuss IPO-related terms, let us get a quick clarity on what is an IPO. IPO is the procedure of opening shares of a private company to investors. A company raises equity investment with the help of an IPO. The company gets an opportunity to obtain capital from the primary market through its IPO. An Upcoming IPO is also an exit strategy for the company’s initial investors and founders by getting a full profit from their private investment.
Terms Related to an IPO
- Abridged Prospectus: It is the first document an IPO investor should get his hands on. The Companies Act, of 1961 has made it mandatory for all companies to release a condensed version of the main prospectus for an IPO, called an Abridged prospectus.
- Draft Red Herring Prospectus (DRHP): It is a draft prospectus that a company submits to the Securities Exchange Board of India (SEBI) a minimum of three weeks prior to the IPO. In these 21 or more days, the SEBI reviews the prospectus and requests changes if required. The general public can also submit its comments to the SEBI in these three weeks.
- Red Herring Prospectus: It is the final version of the prospectus a company submits to the Registrar of Companies (ROC) before it launches the IPO for the public. The prospectus contains information about the company and IPO.
- Price Band: The price band is the range within which different categories of investors (retail investors, institutional buyers, high net-worth individuals, etc.) can bid for an IPO.
- Book Building Process: Reaching the final issue price of an IPO as per the bid by investors.
- Offer Date: The opening date for an IPO from which investors can apply for the IPO shares.
- Lot Size: It is the least count of shares an investor can apply for. An investor who wants to apply for more shares has to bid in multiples of the lot size. For example, if the lot size of an IPO is 100 shares, an investor has to apply for a minimum of 100 shares. If he wants to bid for more, he can do it in multiples of 1000, like 200 or 300 shares. One of the crucial benefits of Demat accounts is bidding for IPO shares.
- Issue Price: Once the booking process is complete, the shares are allotted to investors at the issue price.
- Anchor Investor: Investors can apply for an IPO under several categories. Anchor investor is a sub-category under the Qualified Institutional Buyer category, and 60% of the IPO shares are reserved for this category.
- ASBA: Earlier, when investors applied for IPO shares, the money would get paid to the company at the time of applying for IPO. When the company allotted the shares, it would refund the excess amount to the investor. Under the new system, the money remains blocked in the investor’s account until the allocation of shares. Upon allotment, the reciprocating amount gets debited from the investor’s account and the remaining blocked amount gets released. This process is known as an Application Supported by Blocked Amount or ASBA.
By knowing these IPO-related terms, one can confidently bid for an IPO in the share market.