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Investing in stock markets can be an exciting journey, and one of the best ways to get started is by participating in Initial Public Offerings (IPOs). When a company decides to go public, it offers its shares to investors for the first time through an IPO. This allows individuals to buy shares at an early stage, often at a lower price than what they might trade for later on the stock exchange.
However, before you can invest in an IPO, there’s one essential requirement, you need to open a Demat account. A Demat account acts as a digital vault for storing shares, making stock market transactions seamless and paperless. If you’re new to investing and wondering how to go about it, this guide will walk you through every step, from opening a Demat account to successfully investing in an IPO.
Opening a Demat Account
A Demat account (short for Dematerialized account) is mandatory for buying and selling shares in India. It eliminates the need for physical share certificates and ensures secure and efficient transactions.
How to Open a Demat Account?
Opening a Demat account is a straightforward process. Here’s how you can do it:
1. Choose a Depository Participant (DP): In India, Demat accounts are managed by depositories—NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). However, you cannot open an account directly with them. You need to choose a Depository Participant (DP), which could be a bank, brokerage firm, or financial institution registered with these depositories.
2. Complete the KYC Process: To open a Demat account, you must complete the Know Your Customer (KYC) process by submitting essential documents such as:
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- PAN card (mandatory for stock market transactions)
- Aadhaar card or passport as address proof
- A passport-sized photograph
- A canceled cheque or bank statement for linking a bank account
3. In-Person Verification (IPV): Many brokers require in-person verification (IPV), where you confirm your identity either physically or via video call. With digital advancements, several brokers now offer instant e-KYC and video KYC, making the process hassle-free.
4. Sign the Agreement and Receive Login Credentials: Once the verification is complete, you’ll need to sign an agreement with the DP. This document outlines your rights, duties, and service charges associated with the Demat account. After successful processing, you’ll receive your Demat account number (BO ID), which allows you to trade in the stock market.
Now that your Demat account is ready, you can invest in the market including IPOs and start your journey in the stock market!
Understanding IPOs – What Are They and How Do They Work?
An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time, allowing investors to become shareholders. Companies launch IPOs for various reasons, including raising funds for expansion, repaying debts, or increasing market visibility.
Key IPO Terms You Should Know
Before you invest in an IPO, it’s important to understand some commonly used terms:
- IPO Price Band: The range within which investors can place bids for the shares.
- Lot Size: The minimum number of shares an investor must apply for in an IPO.
- Issue Size: The total number of shares a company plans to offer to investors.
- IPO Allotment Status: The process of checking whether you have been allotted shares after applying.
- Listing Day: The day when IPO shares start trading on the stock exchange.
With a clear understanding of IPO basics, let’s move on to the different investor categories.
Investor Categories in IPOs
IPO shares are not allocated randomly. Instead, they are divided into different categories:
1. Retail Individual Investors (RIIs): This category is for small investors who can apply for shares worth up to ₹2 lakh. A specific percentage of the IPO is reserved for RIIs, and if demand exceeds supply, a lottery system determines share allocation.
2. High Net-Worth Individuals (HNI/NII): Investors applying for shares worth more than ₹2 lakh fall under this category. Unlike RIIs, HNIs get shares through a proportional allotment system rather than a lottery.
3. Qualified Institutional Buyers (QIBs): These include institutional investors like mutual funds, banks, and insurance companies. QIBs typically get a larger share allocation since they invest significant amounts in IPOs.
Understanding these categories is crucial because it affects your chances of receiving IPO shares.
Key Factors to Consider Before Investing in an IPO
Investing in an IPO is more than just securing an allotment. It requires detailed research and strategic planning. Many retail investors make the mistake of following market trends or blindly investing in a company based on media buzz. Before investing in an IPO, here a few key factors that you should consider:
Define Your Investment Goals: Before diving into an IPO, it’s crucial to understand your investment objectives. Are you investing for short-term gains, or do you believe in the company’s long-term growth potential? Understanding this will help you make better decisions on which IPO you should invest in.
Big Investors Don’t Always Signal Big Profits: The presence of well-known investment banks or major financial institutions backing an IPO does not necessarily mean it will yield high returns. These institutional investors operate with different risk assessments and financial models that may not align with retail investors’ interests. Instead of relying solely on big names, thoroughly analyze the company’s fundamentals, financial statements, and future growth potential as outlined in the IPO prospectus.
Understand Why You Are Investing: A successful IPO investment requires clarity on why you are investing. If you have a deep understanding of the company’s business model, growth prospects, and industry trends, you can make an informed decision. Avoid investing solely based on hype or recommendations, do your own research and ensure the IPO aligns with your portfolio strategy.
Market Trends and IPO Performance Go Hand-in-Hand: IPO performance is often influenced by overall market sentiment. During a bull market, strong IPOs tend to perform well, attracting higher investor interest. Conversely, a bearish market can dampen enthusiasm, leading to lower listing gains or even losses. A financially strong and well-positioned company can still generate good returns, but timing plays a crucial role in IPO investing.
How to Choose an IPO to Invest In?
Similar to investing in any investment vehicle, not all IPOs yield profits and investing in IPOs carry certain risks. To make informed decisions, consider these key factors:
- Company Fundamentals: Check the financials, revenue growth, and competitive advantages of the company.
- Valuation Metrics: Compare the IPO pricing with peer companies to assess whether it’s overvalued.
- Market Sentiment: IPOs tend to perform better in bullish markets. Analyze current market trends before applying.
- Subscription Data: High demand from institutional investors is usually a positive sign.
- IPO Allotment Trends: If an IPO is highly oversubscribed, retail investors may have lower chances of getting allotments.
Now that you’ve evaluated an IPO, it’s time to understand its journey from application to listing.
The IPO Journey – From Application to Listing Day
Investing in an IPO is a multi-step process. Here’s what you can expect:
1. Subscription Period (T Day to T+3 Days): Investors can apply for IPO shares within this window. Applications can be made through UPI-based ASBA (Application Supported by Blocked Amount) or net banking ASBA. Any IPO is generally open for 3 days.
2. IPO Allotment Status (T+4 to T+6 Days): Once the IPO bidding closes, the registrar processes the allotment based on demand. You can check your IPO Allotment Status online to see if you’ve received shares.
3. Refunds and Credit of Shares (T+6 to T+7 Days): If you don’t receive an allotment, your blocked funds are automatically refunded. Successful applicants get shares credited to their Demat accounts.
4. Listing Day (T+10 Days): The company’s shares start trading on the NSE and BSE, allowing investors to sell or hold based on market conditions. If the IPO is in high demand, it may list at a premium (higher price), offering instant gains.
How to Start Investing in IPOs?
Now that you understand the IPO process, follow these steps to start investing:
1. Choose an Upcoming IPO: Research and select an IPO that aligns with your investment goals.
2. Apply Through your Demat Account: Use your Demat account to apply via UPI or net banking ASBA.
3. Check IPO Allotment Status: Once allotment is done, verify whether you received shares. You can check the allotment status of the IPO on the registrar’s website like LinkIntime India, Kfin Technologies, and others.
4. Decide on Holding or Selling: On listing day, monitor the stock’s performance and decide whether to sell for profits or hold for long-term growth.
Conclusion
Opening a Demat account is the first step to entering the stock market, and IPOs provide a great way to begin investing. By understanding IPO fundamentals, investor categories, and the step-by-step process, you can make smarter investment decisions. Keep an eye on key IPO days like, IPO subscription and IPO allotment dates to stay up to date. With the right approach, IPO investing can be a potentially rewarding experience.
