Initial Public Offerings

Article Written By: Ashish Gupta

IPO is a term that is very often heard in the financial newspapers regarding companies. But not too many people know what the term means and its implications on investors.

There are two kinds of Public issues that a company can issue to the public- Initial Public offerings and further public offerings. With a public offering, the issuing company makes an offer allowing new investors to enter into its family of shareholders. The issuing company makes detailed disclosures as per the SEBI Disclosure and Investor Protection (DIP) guidelines in its offer document. This is then offered to the public for subscription.

An initial public offering (IPO) is the first sale of existing as well as new securities to the public. This is the first time the company is publicly traded. The securities offered in an IPO are most often but not always young, small companies seeking capital and outside a public market for their shares.

For a company to float a public issue or IPO, they must print the application forms that investors will fill in. Public issues are generally open for only a few days. By law, they should be open for at least 3 days and a maximum of 21 days. The time period is the same for the issues that are funded by financial institutions. In general, however, most of the issues remain open for 3-4 days.

The application form along with a check or DD must be filed by the investor before the deadline for the issue. Some IPOs that are by investment companies (closed ended funds) includes charges that represent a 'load' to buyers.

When considering an application for an initial public offering, there are several factors that investors should consider. It is important to know who the promoters are and their credibility in the market and their origins. The past performance of the company offering the IPO is also very important to track.

It is also important to know what the company deals with - if it is a manufacturing company or part of the service sector. If it is a manufacturing company, the investor should consider the potential of the product manufactured by the company.

With all these factors, it is imperative to measure the risks involved in investing in the IPO of the company. Investing in IPOs involves its fair share of risks, which are quite large. These risks are however essential to obtain high yields.

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