What Is IPO? | Complete Guide To Initial Public Offering For Beginners (2025).

Learn what is IPO, how it works, its types, process, and benefits. A complete beginner’s guide to Initial Public Offering (IPO) and how to invest in IPOs safely.

If you are a new investor looking to enter the stock market, you may often hear the term IPO. Many people wonder how companies get listed on the stock exchange and how investors can buy those shares. The answer lies in one powerful process — the Initial Public Offering (IPO). An IPO gives ordinary investors a golden opportunity to invest in a company right from the beginning of its stock market journey.

Through this blog post, we’ll explain in detail what is IPO, how it works, its types, process, benefits, and key points every investor must know before investing.

💡 What is IPO? (Initial Public Offering Explained)

IPO (Initial Public Offering) is a process through which a private company offers its shares to the public for the first time to raise capital from investors. Before an IPO, a company’s ownership is limited to its founders, promoters, and early investors. But once it decides to go public, it invites general investors to buy ownership stakes in the form of shares.

After the IPO is completed, the company’s shares are listed on the stock exchange (NSE/BSE), and these shares can be freely bought and sold in the open market. In simple words, an IPO allows you to become a part-owner of a company that was previously privately held.

🏦 Why Do Companies Launch an IPO?

A company brings an IPO mainly to raise funds for its growth and expansion. There are several reasons why companies decide to go public:

Business Expansion: To finance new projects, increase production capacity, or enter new markets.
Debt Repayment: To repay existing loans and improve the company’s balance sheet.
Brand Recognition: Listing on the stock exchange increases the company’s visibility and credibility.
Liquidity for Promoters: Early investors or promoters can sell part of their holdings to the public.
Research and Development: To invest in innovation, technology, and product development.

Thus, an IPO not only benefits the company but also provides investors with a chance to participate in its future growth.

📊 How Does an IPO Work?

The IPO process involves several steps that ensure transparency and investor protection. Let’s understand how it works:

✅ Step 1: Company Decision and SEBI Approval.

The company decides to go public and appoints merchant bankers (also called investment bankers) to manage the IPO. The company then files a Draft Red Herring Prospectus (DRHP) with SEBI (Securities and Exchange Board of India) for approval. The DRHP includes all financial and business details such as revenue, profit, risks, and objectives of raising funds.

✅ Step 2: Determining the Price.

The company and its bankers decide the IPO price band or a fixed issue price based on its valuation and market demand.

✅ Step 3: Submitting Bids.

Investors can apply for the IPO within the subscription window (usually 3–5 days) through their Demat and Trading Account.

✅ Step 4: Allotment of Shares.

After the subscription period ends, the company reviews the bids and allots shares to investors based on demand and availability.

✅ Step 5: Listing on the Stock Exchange.

Once allotment is complete, the company’s shares are listed on NSE and BSE, and investors can then trade them freely in the secondary market.

🧾 Types of IPO.

In India, there are mainly two types of IPOs based on how companies decide their share prices:

1. Fixed Price Offering.

In a Fixed Price IPO, the company decides a pre-determined price for its shares before the IPO opens. For example, if the company sets the IPO price at ₹150 per share, every investor must apply at that fixed rate.

Key Features:

The price of the share is fixed by the company in advance.
Investors know the exact price before applying.
The demand for the IPO is known after the subscription closes.

Example:
If an IPO is issued at ₹150 per share, and an investor applies for 100 shares, they must pay ₹15,000.

2. Book Building Offering.

In a Book Building IPO, the company does not set a fixed price but instead provides a price range — usually a 20% difference between the floor price and the cap price.

Floor Price: The minimum price of the share.
Cap Price: The maximum price of the share.

Investors place their bids within this price range based on how much they’re willing to pay. Once the bidding closes, the final price (called the cut-off price) is determined based on demand.

Example:
If the price band is ₹100–₹120, investors can bid for shares at any price within that range. After analyzing all bids, the company may set the final issue price at ₹115.

Key Features:

Investors bid within the given price band.
The final issue price is determined after analyzing all bids.
This method provides better price discovery and transparency.

💰 How to Apply for an IPO.

Applying for an IPO is now easier than ever thanks to online platforms provided by banks and stockbrokers. Here’s how you can apply for an IPO in India:

Step 1: Have a Demat and Trading Account

You must have an active Demat account to hold your allotted shares and a Trading account to buy or sell them.

Step 2: Choose the IPO

Visit your broker’s website or app and select the ongoing IPO you wish to invest in.

Step 3: Enter Bid Details

Enter the number of shares you want to apply for and the bid amount (within the price band).

Step 4: Use ASBA Facility

Apply through ASBA (Application Supported by Blocked Amount) — your money will remain in your bank account but will be blocked until the allotment process is complete.

Step 5: Allotment and Listing

If you receive an allotment, the shares will be credited to your Demat account. Once listed, you can sell or hold them as per your investment strategy.

🌟 Benefits of Investing in an IPO.

Early Investment Opportunity:
Investors can buy shares before they are available to the public in the secondary market.
Potential for High Returns:
If the company performs well after listing, IPO investors can earn significant profits.
Transparency:
All company details are disclosed in the DRHP, ensuring that investors can make informed decisions.
Long-Term Growth:
By investing early, you can benefit from the company’s future growth and expansion.
Listing Gains:
Many IPOs get listed at higher prices than their issue price, giving investors instant profits.

⚠️ Risks and Precautions in IPO Investment.

While IPOs can be profitable, they also involve risks.

Market Volatility: The stock price may fall after listing due to market conditions.
Overvaluation: Some companies may overprice their IPOs to raise more capital.
Limited History: New companies may lack performance records, making analysis difficult.
Allotment Uncertainty: High-demand IPOs often result in partial or no allotment for small investors.

Always research the company’s financial performance, management quality, and industry outlook before applying.

Disclaimer: The information written in this article is for educational purposes only. If you want to invest in the stock market, you should learn about the stock market yourself or take advice from a financial advisor and certified expert. The stock market is subject to risk. Before making any investment, you must take expert advice.

🔚 Conclusion

Through this article, we have explained in detail what is IPO, its types, benefits, and how you can invest in one. An IPO is a great opportunity for investors to invest early in growing companies and become part of their success story. However, like all investments, it requires research, patience, and understanding. We hope this guide helped you understand IPOs better. If you found it useful, please like, share, and comment to support us!

FAQ

1. What is IPO?

When a company issue shares for the first time, that company has to bring an IPO in the share market. That company raises money for the company through IPO, so that the company’s business can grow in the future.

2. How many types of IPO are there?

There are two main types of IPOs, Fixed Price Offering and Book Building Offering.

3. What are the benefits of IPO?

Due to IPO, you get the opportunity to buy shares at a lower price, and you get a great chance to invest in IPO.

What is IPO? | Complete Guide to Initial Public Offering for Beginners (2025).