What are the Various Types of IPO?
18 November, 2024
While investing in an Initial Public Offering (IPO) can be thrilling, it's important to remember that not all IPOs are guaranteed successes. Some may not produce desirable returns or align with your financial objectives. It is crucial to have a solid understanding of the basics before diving into the world of IPOs. This includes being familiar with the different types of IPOs, which can vary depending on how shares are offered, such as through a fixed price method or book-building process. By staying informed about these variations, you can make more informed choices and select IPOs that best suit your financial goals. This knowledge will prove beneficial in avoiding potential downfalls and maximizing your investments.
The category of IPO, whether fixed price or book building, has an impact on investor choices. Familiarizing oneself with these elements can assist in making knowledgeable decisions, improving the chances of achieving financial goals through IPO investments.
Let us now discuss the various types of IPO to better equip you for your IPO investments.
Types of IPO
As stated previously, there are two kinds of IPOs: Fixed Price Issues and Book Building Issues. Now, let us delve into these IPO types further –
Fixed Price Issue - A Fixed Price Issue involves the IPO issuing company determining the issue price beforehand, offering shares at a fixed rate to investors. This price is established in collaboration with hired underwriters and takes into account factors such as the company's financial performance, industry trends, and market conditions. Investors who apply for these shares are aware of the precise allotment price if their application is successful. While this method offers transparency and simplicity, it may not always accurately reflect the market value of the shares due to ignoring investor demand. As such, there is a risk that shares may be either undervalued or overvalued, potentially impacting investor returns in the secondary market.
Book Building Issue - In a Book Building Issue, the IPO issuing company does not set a fixed price. Rather, they provide a price range for investors to bid within. This bidding period is open to both institutional and retail investors, who can submit their desired number of shares and proposed price. The final price is then determined using this method of price discovery. This process encourages more accurate pricing and broader market involvement, as investors' bids play a role in setting the final price. However, it may be challenging for smaller investors to participate due to its complexity.
In addition to the aforementioned common types of IPOs, there is also a less popular option known as Dutch Auction IPO in the Indian stock market. This type allows investors to place bids specifying their desired number of shares and the price they are willing to pay. Unlike traditional IPOs, the initial price in a Dutch Auction starts high and decreases until it reaches a match with the company's offered shares.
Fixed Price Vis-à-vis Book Building Issue
To enhance your understanding of the distinction between the two types of IPO, we have outlined below their dissimilarities. Depending on your objective and approach towards uncertainty, comprehending the primary distinctions between them will aid in making well-informed decisions.
Price - The share price is determined on the first day of the issue and is clearly stated on the order document. However, instead of a specific amount, there is a fixed price range. The final share price will be determined after the IPO issue closes.
Payment - The full payment for the fixed price issue must be made upon application. In the case that shares are not allocated, the amount will be refunded. However, in a book building issue, applicants can make their payments after the allocation process.
Demand - The IPO shares' demand is only revealed on the day of closing. On a daily basis, the status of IPO applications can be monitored.
Which One to Choose?
Although there are advantages and drawbacks to each, the following comparative factors can assist in determining which option is more suitable for you –
Fixed Price Issue provides increased transparency and certainty for investors, as the price is predetermined. In contrast, Book Building Issue follows a bidding process that may be less transparent.
Book Building Issue allows for more accurate price discovery compared to Fixed Price Issues, as it is determined by investor demand. This ensures that the final price reflects the true market value of the shares.
The Book Building Issue encourages a diverse range of investors to participate, including institutional and retail investors. In contrast, Fixed Price Issues may hinder participation, particularly for retail investors.
Book Building Issue provides flexibility in determining the price and allocation of shares according to investor demand. In contrast, Fixed Price Issue involves a set price that may not always be advantageous for both the issuer and investors.
The Book Building Issue involves the possibility of under or overpricing shares, impacting investor profits. The Fixed Price Issue provides more assurance but could lead to missed prospects if the price is not ideal.
By now you should have a fair idea about various types of IPO and how to choose the right one as per your risk appetite and pricing preferences. Once you have made up your mind to start investing in IPOs, open an account with HDFC Sky which is a quick hassle-free process and ensure a seamless IPO investment journey.
*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not an investment recommendation. Investments are subject to market risks and other risks.
