What is IPO with Example and Proper Explain Primary Market
Introduction
In the world of investing, the term IPO often makes headlines. Whether it's a tech startup going public or a traditional company raising funds, Initial Public Offering (IPO) is a gateway for companies to raise capital and for investors to become part-owners.
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| What is IPO and Primary Market ? |
What is an IPO (Initial Public Offering)?
An IPO (Initial Public Offering) is the process by which a private company offers its shares to the public for the first time. Once the shares are issued, the company becomes listed on the stock exchange like NSE or BSE in India.
In simple words: An IPO is a way for companies to raise money from public investors by selling ownership (shares) in the company.
Why Do Companies Launch IPOs?
- To raise capital for expansion, paying debt, or infrastructure.
- To gain public attention and credibility.
- To allow early investors to exit and realize profits.
- To use shares as a currency for future mergers or acquisitions.
Example of an IPO
Let’s take the example of Zomato:
- Before IPO: Zomato was a private company funded by venture capitalists.
- IPO Year: July 2021.
- IPO Price: ₹76 per share.
- Funds Raised: Around ₹9,375 crores.
- Result: Successful listing on the stock exchange.
Now, anyone can buy and sell Zomato shares on the NSE or BSE.
What is the Primary Market?
The Primary Market is where new securities are issued for the first time. When a company launches its IPO, it happens in this market.
Key Features:
- Fresh issue of shares directly from the company to investors.
- Funds raised go directly to the company.
- One-time transaction for each issued share.
Difference Between Primary Market and Secondary Market
| Feature | Primary Market | Secondary Market |
|---|---|---|
| Purpose | To raise fresh capital | To trade already issued securities |
| Seller | Company itself | Existing investors |
| Price | Fixed or via book building | Demand and supply driven |
| Examples | IPOs, FPOs | Stock exchange (NSE/BSE) |
How Can You Invest in an IPO?
- Open a Demat and Trading Account.
- Check upcoming IPOs on NSE/BSE or financial news.
- Apply via your broker or UPI/net banking (ASBA).
- Wait for allotment — if successful, shares are credited to your Demat account.
Risks and Rewards of IPO Investment
✅ Pros:
- Early investment in growing companies.
- Chance of listing gains.
- Potential for long-term returns.
⚠️ Cons:
- Risk of overvaluation.
- Limited historical financial data.
- Possibility of loss if stock lists below issue price.
How IPO Shares Reach Retail Investors? (Explained with Diagram)
When a company like Reliance goes public through an IPO (Initial Public Offering), it follows a structured process regulated by SEBI. The diagram below simplifies how IPO shares reach retail investors.
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| IPO Process |
1. Company Issues IPO
The journey begins when a company, for example Reliance, decides to raise capital from the public by issuing an IPO.
2. Listing on Stock Exchanges (NSE, BSE)
Once SEBI approves the IPO, shares are listed on major stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).
3. Role of Depository Participants (DPs)
Investors don’t buy directly from the exchange. Instead, they use brokers or Depository Participants (DPs) like Angel Broking, Zerodha, Groww, etc. to apply for IPOs or buy shares in the secondary market.
4. Shares Stored in Demat Account
Once shares are allotted, they are stored in a digital locker called a Demat (Dematerialized) Account, managed by NSDL or CDSL. This ensures safe and paperless ownership.
5. Trading by Retail Investors (Users)
Investors (like USER1 and USER2 in the diagram) can then buy or sell these shares through their broker platform using a trading account connected to their Demat account.
6. SEBI's Role
SEBI (Securities and Exchange Board of India) regulates this entire process to protect investors and ensure transparency and fairness in the market.
Summary Table:
| Entity | Role |
|---|---|
| Company (e.g., Reliance) | Issues IPO to raise capital |
| NSE/BSE | List shares for trading |
| DPs (Zerodha, Angel, etc.) | Provide platform for investors |
| Demat Account | Stores shares electronically |
| Retail Investors | Buy/Sell shares |
| SEBI | Regulates and protects the system |
This flow is crucial for understanding how the stock market works and how IPO shares become available for public trading. Whether you're a beginner or an experienced trader, knowing this process builds your stock market foundation.
Final Thoughts
An IPO is the first step for a company to go public and raise funds from the masses. The Primary Market plays a critical role in this process. For investors, understanding IPOs opens doors to exciting opportunities — just remember to research and invest wisely.
Back To Learn :
🔗 What is Share Market?
🔗 What is Secondary Market ?
FAQs – What is IPO and Primary Market
Q1: Can anyone invest in an IPO?
Yes, any Indian resident with a Demat account can apply.
Q2: Is IPO investment safe?
IPOs offer potential but come with risk. Always review the Red Herring Prospectus.
Q3: What is the minimum investment?
Usually 1 lot, costing ₹14,000–₹15,000 depending on the IPO.
Q4: When do shares get listed?
Typically within 6–10 days after the IPO closes.
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