IPO Explained: What It Means and Should Beginners Invest in It?

Introduction

Every now and then, you’ll hear headlines like “XYZ company is launching its IPO next week” and see a wave of excitement in the market. Investors rush to apply, news channels debate the company’s valuation, and social media buzzes with opinions. But here’s the real question: what exactly is an IPO, and should beginners even think about investing in it?

This guide breaks down IPOs in plain language, explores the opportunities and risks, and helps you decide whether they’re a smart choice for your investment journey.

What is an IPO?

IPO stands for Initial Public Offering. It’s the first time a private company offers its shares to the general public in the stock market. In simple terms, it’s how a company moves from being privately owned (by founders, early investors, and venture capitalists) to publicly traded.

When a company launches an IPO:

• It raises money from the public.
• It gets listed on a stock exchange like NSE, BSE, or NASDAQ.
• Its ownership is now divided among shareholders.

Example: When Zomato went public in 2021, it raised thousands of crores and gave retail investors a chance to own a piece of the company.

Why Do Companies Launch IPOs?

Companies don’t just go public for fun. There are solid reasons behind it:

• Raising Capital for Growth
• IPO funds can be used for expansion, launching new products, or entering new markets.
• Paying Off Debt
• A public offering helps companies clear their balance sheets.
• Liquidity for Early Investors
• Founders and venture capitalists can sell part of their stake to realize profits.
• Brand Recognition and Trust
• Being listed on a stock exchange builds credibility.

How Does an IPO Work? Step by Step

If you’re a beginner, understanding the process will make things clearer.

1. Company Prepares for IPO – Hires investment bankers, prepares a prospectus, and files with regulators.
2. Regulatory Approval – In India, SEBI reviews the documents.
3. Price Band is Set: The business decides the range (for example, ₹70–₹80 per share).
4. Subscription Period – Investors apply for shares during a 3–5 day window.
5. Allotment of Shares – If demand is high, allotment happens via lottery.
6. Listing on Stock Exchange – Shares begin trading on NSE/BSE.

Types of IPO Investors

Not all IPO investors are the same. Here are the main categories:

• Retail investors are novices and modest investors, such as myself.
• Those who apply more frequently are known as High Net Worth Individuals (HNI).
• QIBs include mutual funds, banks, and insurance companies.

Should Beginners Invest in IPOs?

This is the million-dollar question. The response is not as straightforward as a yes or no. Let’s look at both sides.

Pros of Investing in IPOs:

• Early Entry Advantage – If you get in before the company becomes widely popular, there’s potential for high returns.
• Listing Gains – Many IPOs open at a higher price than the issue price, giving instant profits.
• Ownership in Big Brands – You get to own shares of companies you use daily (like Paytm, Nykaa, Zomato).
• Portfolio Diversification – New sectors and industries can enter your portfolio.

Cons of Investing in IPOs:

• High Risk – Not all IPOs perform well. Some crash after listing.
• Hype vs Reality – Media buzz can mislead beginners into overvaluing companies.
• Uncertain Future – A company might look promising but could fail to deliver profits.
• Oversubscription – You may apply but not get shares if demand is too high.

Key Things Beginners Must Check Before Investing

Blindly applying for every IPO is a recipe for disaster. Here are factors you should evaluate:

• Company’s Business Model – Do you understand what they do and how they make money?
• Financial Health – Look at revenue growth, profitability, and debt levels.
• Valuation – Is the IPO price justified compared to industry peers?
• Promoter Background – Strong leadership matters.
• Industry Outlook – Is the sector growing, or is it saturated?
• Use of IPO Funds – Are they raising money for expansion or just to repay debt?

Common Mistakes Beginners Make in IPO Investing

Avoid these traps:

• Investing based only on hype.
• Applying for every IPO without research.
• Ignoring fundamentals and focusing only on listing gains.
• Over-allocating money in IPOs instead of balancing with long-term investments.

Famous IPO Success Stories

• Infosys (1993) – Early investors multiplied their wealth many times over.
• Google (2004) – One of the world's most successful initial public offerings.
• Reliance Power (2008) – A cautionary tale where hype led to disappointment.

How to Apply for an IPO (Step-by-Step for Beginners)

If you’re new, the actual application process can feel confusing. Here’s a quick breakdown:

1. Demat Account is a Must – You need a Demat account with a broker like Zerodha, Groww, Upstox, or through your bank.
2. Check IPO Availability – During the subscription period, log into your broker’s app or website.
3. Enter Bid Details – Choose the lot size (minimum shares) and the price within the band. Most beginners go with the “cut-off price.”
4. UPI Approval – Confirm your bid using UPI (Google Pay, PhonePe, Paytm).
5. Wait for Allotment – If allotted, shares are credited to your Demat account before listing day.
6. Listing Day – You can sell on day one for listing gains or hold long-term.

Risks That Beginners Often Overlook

Most blogs talk about obvious risks like “loss of money,” but here are subtle ones:

• Lock-in Period for Promoters – If promoters dump shares after their lock-in ends, stock prices may fall.
• Grey Market Premium (GMP) Misleading – Many investors chase IPOs based on GMP, but it doesn’t always predict listing price accurately.
• Sector-Specific Risks – A tech IPO might look exciting, but regulation changes could kill profitability.

Alternatives to IPOs for Beginners

If IPOs feel too risky, beginners can still grow wealth through:

• Index Funds/ETFs – Track market performance with lower risk.
• Blue-Chip Stocks – Already established, less volatile companies.
• Mutual Funds – Professional fund managers pick stocks for you.

Tips for Beginners Entering IPOs

• Start small; don’t invest money you can’t afford to lose.
• Read the company’s Red Herring Prospectus (RHP) carefully.
• Don’t chase every IPO—be selective.
• Focus on companies with strong fundamentals, not just popularity.
• Treat IPOs as part of your broader investment strategy.

Conclusion

So, should beginners invest in IPOs? Yes—but with caution. IPOs can be exciting and profitable, but they’re not guaranteed wins. Some deliver massive returns, while others disappoint.

If you’re a beginner:

• Start small.
• Research thoroughly.
• Don’t let hype cloud your judgment.

Remember, IPOs are just one way to invest. Combine them with long-term stock investments, mutual funds, or index funds to build a stable portfolio.