What are the Different Types of IPO? : The initial Public offering is a first step towards raising money through the public market. Through IPO, investors get an opportunity to buy shares before they enter the stock market. The maiden offering of the company is of great importance. It gives a much needed boost to the company for further expansion.
Fixed price and book building are the two types of IPO. The difference between the two IPOs is quite simple to understand.
1⃣ Fixed Price Issue [Types of IPO]:
The company offers its shares at a fixed price. The investors know the share price before the firm offers shares for public. The demand from the market for the shares is out only when the issue closes. An investor has to pay the full price of the share while applying for IPO. The price per issue is set after a systematic evaluation of the company’s financial aspects. The price shows up in the printed order document which elaborates the price in light of various factors. This one is first Types of IPO.
2⃣ Book Building Issue [Types of IPO] :
Through book building issue, the company offers only a 20% price on shares to the investors. Investors bid before the settlement of the final price. Investors declare how many shares they are buying and what amount they are ready to give out. There is no definite price. Instead, there are lowest and the highest share prices. Depending upon the bids of the investors, the final price is fixed when the bidding process closes.
✓ Fixed Price vs. Book Building Issues :
Investors have to pay 100% advance payment under the fixed price issues application. Under Book Building, QIBs need to pay 10% of the payment in advance. Other investors have to 100% advance along with the application.
In the case of the fixed price issue, 50% of the shares are reserved for applications above Rs. 1 lakh and balance 50% below Rs. 1 lakh. While in the case of book building, the company reserves 50% shares for QIBs and 35% for small investors. The balance shares are reserved for other investors.
The companies float either fixed price issue or book building or a mix of both. IPO is a wonderful source of raising capital for business expansion. Investing in IPO is tricky due to less information available on the new entrants. For successful investment in IPO, it is essential to track the upcoming offerings.
⇒ Process Share Allotment in IPO :
The companies shares are available in the public market for the first time. As per the past records, all the good IPOs show over subscription of retail investors. In the case of qualified institutional buyers, there is a proportionate share allotment. Process for the retail investors is a bit complex. They can go for investment in smaller lots. A maximum of 2 lakhs is the limit for the retail investors. If the investor applies for more than Rs. 2 lakhs, his status changes to high net-worth individual.
The investors have better chances of good returns with the book building issues. The most common reason for non-allotment in good IPO is huge over subscription. A lucky draw process reduces chances for many investors for allotment or full allotment. Before investing in IPO know first ” What are the Different Types of IPO ? ” .