How to Invest in IPO?

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  • 16 Dec 2023

There are two ways of applying for an IPO:

  • Through a trading account
  • Through a bank account

Let’s look at both the options in detail.

A trading account is a prerequisite. It enables you to buy and sell securities on the stock market. If you wish to trade in IPO shares—or even in regular stocks—you need to have a trading account. Otherwise, the possibility of applying for IPOs will remain closed to you.

The process of getting a trading account is similar to applying for a regular savings bank account. Here is an overview of the main steps:

Step 1: Identify Where To Get The Trading Account

Start by shortlisting a few reputed stockbrokers or stockbroking firms. Compare their brokerage rates and check for available discounts. It may be tempting to choose the broker that charges the lowest fee. But you should prioritize service over cost.

Pick a broker that will respond to your trading orders in a timely manner. When investing in IPOs, you need to invest quickly. Otherwise, you could miss the IPO boat.

Key takeaway: Select a reliable broker that charges reasonable fees and provides timely service.

Step 2: Submit Your Trading Account Application

Contact the broker or brokerage firm. They will provide you with an account opening form and a Know-Your-Customer (KYC) form. Fill in the forms with the correct details and provide proofs of identity and address.

Step 3: Complete The Verification

The broker or brokerage firm will contact you for verification. It may happen in person or via telephone. You may have to provide specific personal details to complete the verification process.

Soon after, the broker will hand you the details of your new trading account. You are now ready to make your first IPO investment. Here’s how you can do it:

  • Log in and make a choice: Start by logging into your trading account. You must now choose the IPO that you would like to invest in. Make sure you do your preliminary research first, though. Assess if the IPO is worth investing in.

  • Place your order: Specify the number of shares you want through the trading account. In a fixed-price IPO, the price of each share issued is already decided. In case of a book-building IPO, you will have to select the price from the given price band. (While the above process is carried out entirely online, some brokers let you order over the phone as well)

  • Verification: The stock exchange will now verify the details of your order. That includes the price of the shares, the availability of a sufficient number of shares, and other relevant information. If everything checks out, the exchange will confirm your order.

  • Allotment: The IPO shares allotted to you will then be deposited in your demat account. If you wish, you can sell the allotted shares too. But this is possible only after the company lists on the stock exchange. Tip: Link your trading and demat accounts for a seamless investment experience.

This is how you apply for an IPO through a trading account. The second option to apply for an IPO is through a bank account.

You can apply for an IPO through your bank account in two ways: offline and online. Here is a quick look at how it works.

The Offline Process

Step 1: Visit a branch of your bank that offers a facility for making IPO investments. It does not matter if your account is with some other branch. Keep in mind, however, that only select branches offer this facility. So, it is best to call and check with your bank in advance.

Step 2: Fill in the Application Supported by Blocked Account (ASBA) application form. You will have to provide your bank account number, PAN number, and demat account details. Submit the duly filled in form to the branch and collect the acknowledgement slip. Use the reference number on the slip to follow up on your ASBA status.

Step 3: Make an application to invest in the IPO of your choice. Mention the number of shares you want and quote the price acceptable to you (as per the price band of the IPO). Fill in the details correctly and ensure that you have sufficient funds in your linked bank account. An inability to do this could lead to rejection of your application.

Step 4: The bank will block the application amount in your account (as per the ASBA facility). It will then send your IPO application to the specified stock exchanges.

The Online Procedure

Step 1: You can apply online by logging into your account through internet banking. It is advisable to complete the one-time registration process in order to link your demat account and PAN, among other details. This will save you the hassle of having to provide the details all over again in subsequent transactions.

Step 2: Submit your IPO application request. At this stage, you must select the IPO you wish to invest in. Mention the number of shares you wish to buy and the price you are willing to pay. You may be able to make multiple investment bids in the IPO at a time. Check the limit on the number of bids before you start.

Step 3: Keep in mind that ASBA is mandatory for online IPO applications. Ensure there is sufficient balance in your account. Enter your bank account, demat account and other details. It helps to run a check for discrepancies before confirming your order.

Step 4: Save the unique transaction number that is generated. Use this for enquiries regarding your IPO investment.

Tips: If your bank does not have an online platform, you can fill in the e-ASBA form on the website of the National Stock Exchange. Banks also offer information on new IPOs and recent listings. Check with your bank about how you can access such information, along with the IPO prospectus and offer documents.

The short answer is: Yes, you can invest in an IPO without a demat account.

But the long answer is a bit different.

Whether or not you need a demat account to invest in an IPO depends on two factors:

Whether you wish to sell the shares you buy in an IPO Theoretically, you do not need a demat account to invest in an IPO, for you could apply for shares in the physical form. But the physical shares that you receive cannot be traded on the stock exchange. You will be tied to the shares until you convert them into the demat form.

The issue size of the IPO you plan to invest in If the issue size is Rs 10 crore or more, it is mandatory for investors to have a demat account.

What Is A Demat Account?

This is where your digital shares are stored once you buy them. Later, if you end up selling one or more shares, the shares will be debited from your demat account.

How To Open A Demat Account

You can open a demat account with a bank or a brokerage firm. Just check that it is an authorised agent of either of the two main depositories in the country (NSDL and CDSL).

Tip: If you go through a bank, you could get a trading account, a demat account, and a savings bank account in one go. Keep in mind that while a demat account allows you to invest in IPOs, you will need a trading account to sell the shares you buy.

Now that you know the various ways to invest in an IPO, the next question that may crop in your head is: what happens after you bid on shares via an IPO? The answer is that the company allots shares to bidders, subject to certain conditions. So, let’s look at how the allotment process is done.

It Starts With The Bidding

It does not matter whether you are making your first IPO bid or are an experienced IPO investor. You need to make a bid properly. If there are problems with the details in your form, your bid could get rejected.

The Problem Of Oversubscription

At times, the number of IPO applications exceed the number of shares. This means the allotment has been oversubscribed. In such a case, the oversubscribed shares are allotted proportionately to the applicants.

Good IPOs are usually oversubscribed. Let us look at the example of BSE IPO to understand this. In this case, the IPO was oversubscribed 51.01 times. It means that the total demand was for 55 crore shares, when only 1.07 crore shares were on offer.

If one considers the retail section alone, the oversubscription was 6.48 times the allotted shares. Remember that investors can bid for more than one lot each. Looking at the lots of retail shares, and assuming each investor has applied only for one share, the total demand was 3.98 times.

When the total number of applications received for retail section is more that 1x of the lots available, no application is allotted more than one lot. This is to ensure that all investors have an equal chance of being allotted IPO shares, regardless of the number of lots they have bid for. In other words, an investor who bid for just one lot will be treated on par with another investor who bid for 10 lots. This way fairness is ensured in IPO allotment regardless of the buying power of individual investors.

In case of BSE IPO, a retail investor had a 1 in 3.98 chance of being allotted 1 lot of shares. In other words, close to 75% of retail investors were allotted no IPO shares and a little over 25% were allotted 1 lot each.

Given the IPO allotment process described above, it is no surprise that many investors fail to get shares allotted in an IPO. This is why it is advisable to apply for IPO shares on the last day of bidding. This way, one can have a good estimate on how large the subscription will be - and in case an oversubscription is expected, one should bid for just one lot and not unnecessarily lock up their capital.

Quick Recap

There are several ways of being part of an IPO. Bank accounts and trading accounts are two ways of bidding on IPO shares. It is also necessary to have a demat account. Otherwise, you won’t be able to sell the shares at any point of time.

Discover the comprehensive upcoming IPO listing here.

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