What Is an IPO? How an Initial Public Offering Works
An IPO is when a private company sells shares to the public for the first time and lists them on a stock exchange.
Key takeaways
- An IPO lets a company raise money from the public and list on an exchange.
- Retail investors bid in lots within a price band.
- Listing gains are never guaranteed, so read the offer document first.
An IPO, or initial public offering, is when a private company sells its shares to the public for the first time and gets listed on a stock exchange such as NSE or BSE. After listing, anyone can buy and sell those shares in the market.
How does an IPO work?
The company hires merchant bankers, files an offer document with the regulator, and sets a price band. Investors then bid during a short subscription window. Here is the usual sequence:
- The company files its draft offer document and receives regulator approval.
- The price band, lot size and dates are announced.
- The IPO opens for bidding, usually for three working days.
- Shares are allotted to bidders. Applications that miss out get their money back.
- The shares list on the exchange and start trading.
Why do companies launch an IPO?
Companies go public to raise capital for growth or to repay debt, to give early investors and founders a way to sell part of their stake, and to gain visibility and credibility. Some issues are entirely fresh shares, some are an offer for sale by existing holders, and many are a mix.
What are the risks of investing in an IPO?
An IPO price can be too high, demand can fade after listing, and a company with little trading history is harder to value. A high grey market premium does not guarantee a listing gain. Read our explainer on what GMP in an IPO really means before you rely on it.
IPO terms every investor should know
| Term | Meaning |
|---|---|
| Price band | The range within which you can bid for a share. |
| Lot size | The minimum number of shares you must bid for. |
| Cut-off price | Bidding at the upper end of the band so your bid is valid at the final price. |
| Subscription | How many times the shares on offer have been bid for. |
| Allotment | The process of deciding who receives shares. |
Ready to bid? Follow our step-by-step guide on how to apply for an IPO in India, and check what is open now on the IPO calendar.
Frequently asked questions
Is an IPO always profitable?
No. Some IPOs list at a gain and some list below the issue price. Returns depend on the price, the company and market conditions on listing day.
Who can apply for an IPO?
Any investor with a demat account and a bank account linked to UPI or ASBA can apply, as long as they meet the rules of the category they bid in.
How long does an IPO stay open?
Most IPOs stay open for three working days for bidding, after which allotment and listing follow within a few days.
