What is an IPO? Complete Beginner-Friendly Guide (With Real Examples)

An IPO (Initial Public Offering) is the process where a private company sells its shares to the public for the first time and becomes listed on the stock market (NSE/BSE).

Imagine this simple real-life example:

👉 Think of a successful local bakery in your city. It’s famous, customers love it, and the owner wants to open 20 new branches across India. But expansion needs money.

So the bakery decides: “Let’s invite the public to become part-owners.”

This moment — when the public gets a chance to buy shares — is called an IPO.

Why Do Companies Launch IPOs?

Companies go public for several reasons:

1. To Raise Money (Capital)

   Funds for:

   • New factories
   • Technology upgrades
   • Marketing
   • Expansion
   • Debt repayment

2. To Gain Public Trust

   Listed companies follow strict rules → more transparency.

3. To Give Exit to Early Investors

   Founders, VCs, angel investors get a chance to cash out.

4. To Build Brand Value

   Being listed increases reputation massively.

How an IPO Works (Step-by-Step Explained)

Here is the entire IPO process simplified:

1. Company prepares financial documents

   Merchant bankers and auditors review everything.

2. They file DRHP with SEBI

   This is a long PDF explaining the business.

3. SEBI reviews and approves

   Ensures transparency + investor safety.

4. Price Band is announced

   Example: ₹450–₹480 per share.

5. IPO opens for 3 days

   Retail, HNI, and QIB investors apply.

6. Allotment happens

   If more people apply → lucky draw system.

7. Company lists on NSE/BSE

   The share begins trading publicly.

Real-Life IPO Example (Super Simple)

Let’s say ChaiKing Pvt. Ltd. decides to go public.

• They set a price band of ₹100–₹110
• GMP shows ₹25 premium
• You apply for 1 lot (100 shares)
• Allotment happens
• Expected listing price = 110 + 25 = ₹135
• Listing gain = ₹25 × 100 shares = ₹2,500 profit

This is how people earn from IPOs.

Key Terms Every Beginner Must Know

• Issue Price

  Price at which shares are offered.

• Listing Price

  Price at which stock opens on listing day.

• GMP (Grey Market Premium)

  Unofficial market price before listing.

• Cut-Off Price

  Best option for retail investors.

• Lot Size

  Minimum shares you must apply for.

Benefits of Investing in IPOs

• Potential listing gains
• Early entry into emerging companies
• Transparent pricing
• Long-term wealth creation
• SEBI-regulated allotment system

Risks of Investing in IPOs

• Overvaluation
• Weak fundamentals
• Listing at discount
• Market volatility
• Low subscription

Conclusion

IPOs give everyday investors a chance to become early shareholders in growing companies. If you understand the process, GMP, and fundamentals — IPO investing becomes simple and powerful.