When a private company decides to go public, it starts selling shares to the public for the first time. This process is known as an Initial Public Offering (IPO). Through IPOs, companies raise money to support their growth, and in return, investors get a chance to own a part of the company from its early public days. This article will explain the basics of IPO bidding, strategies to help you succeed, and common pitfalls to avoid.
What is IPO Bidding?
IPO bidding is how investors place offers to buy shares in an IPO. After all the bids are in, shares are allocated to successful bidders. The funds raised help companies expand and grow. IPOs are a popular choice for investors as they can create wealth over time, though investments do come with risks. IPO bidding is open for a few days, usually between 3 and 21 days, depending on the company.
How to Prepare for IPO Bidding
Before bidding for an IPO, you need to:
- Research and Advice
Choose an IPO based on good research. You can also take advice from experts, banks, or brokers to make an informed decision. - Accounts and Documents
Set up a bank account and a Demat-cum-trading account with a Depository Participant (DP) like a bank or broker. Have all documents ready, including your PAN card and address proofs. - Fill Out the ASBA Form
Complete the ASBA (Application Supported by Blocked Amount) form. This lets your bank block the amount in your account for the bid. Only the cost of allocated shares is deducted, and any leftover is unblocked. You can submit the ASBA form in person or online.
Key Strategies for Successful IPO Bidding
To increase your chances of a successful bid:
- Avoid Large Applications
All retail applications under Rs. 2 lakh are treated the same. Placing many small bids from different accounts can boost your chances more than one large bid. - Use Multiple Accounts
Submitting bids from more than one account is especially helpful in highly popular IPOs. - Bid at the Cut-Off Price
Placing a bid at the cut-off price shows you’re willing to pay the final price. This can increase your chances of getting shares, and you’ll get a refund if the price is lower. - Apply Early
Submit your application on the first or second day to avoid last-minute issues. Applying early also reduces the risk of missing out. - Check Details Carefully
Fill in your name, amount, and bank details correctly to avoid rejection. The ASBA process is secure, but errors may still cause technical issues. - Buy Parent Company Shares
If the parent company of the IPO firm is listed, buying its shares may allow you to apply as a ‘shareholder,’ increasing your chances of getting shares in the IPO.
Common Mistakes in IPO Bidding
Even though IPOs offer potential profits, avoid these mistakes:
- Chasing Quick Gains
Investing in an IPO just for listing day profits can be risky. Focus on the IPO’s long-term potential instead. - Not Doing Enough Research
Check the company’s business model, finances, and risks. Good research is key to wise investment. - Ignoring Valuations
Be cautious about high valuations, especially for tech IPOs. Don't rely only on provided valuations; check market trends and other factors. - Falling for Subscription Hype
High subscription numbers and big-name investors don’t guarantee success. Base your decisions on your own research. - Getting Caught in Marketing Hype
Some IPOs are heavily marketed. Assess them carefully and don’t let the hype cloud your judgement.
Understanding IPO Bidding Trends
To assess IPOs better, consider these factors:
- Draft Red Herring Prospectus (DRHP)
The DRHP reveals the company’s operations, financials, risks, and plans. Reviewing it is essential. - Financial Ratios
Compare ratios like P/E (Price-to-Earnings), P/B (Price-to-Book), and P/S (Price-to-Sales) with other companies in the same industry. - Growth Potential
Look for growth indicators, such as plans for expansion, new products, and market potential. - Management Team
Experienced leadership can greatly influence a company’s success, so check their track record. - Oversubscription
Oversubscription shows high interest, which may lead to price changes after the listing. - Institutional Investors
If institutional investors are participating, it can signal good quality and potential for the IPO.
How to Bid for an IPO?
Here’s a checklist to guide you through IPO bidding:
- Bid Amount
Confirm the minimum lot size in the IPO prospectus and ensure you have enough funds in your account. Retail investors can bid up to Rs. 2 lakh. - Where to Bid
You can bid online using your Demat and trading account or visit a broker’s office for offline bidding. - Bid Price
Retail investors can bid at the cut-off price, especially in popular IPOs, to increase their allotment chances. Refunds are made after allocation if the amount is higher than the final price. - Using the Online Bidding Process
Log on to your trading platform, go to the IPO page, choose the IPO, enter your bid, and submit. You’ll receive an application number and transaction details. - Receiving Shares
Receiving shares isn’t guaranteed. If the IPO is oversubscribed, you may get fewer shares than you bid for or none at all. Unused funds will be unblocked, and allotted shares go to your Demat account.
Conclusion
IPO bidding allows investors to be part of a company’s early growth stages. By understanding the process and using effective strategies, you can improve your chances of success in IPO investments. Avoiding common mistakes, like relying on hype or skipping research, will help you make wise decisions. A well-researched approach can make the most of IPO opportunities.
Consider using a portfolio or share market app to stay updated on IPO news and trends. To help manage your investments easily, download the Bajaj Finserv app and make the most of the primary market.
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