An IPO, or Initial Public Offering, is an important milestone for any business seeking to raise funds from the public through the issue of shares. Pricing an IPO involves a multitude of factors that determine the value of the shares being issued. Discover the process of how an IPO is priced, the effect of an IPO subscription, and how you can participate in an IPO using a Demat account with zero brokerage.

Importance of IPO Pricing

Choosing the appropriate IPO price is essential since it has a direct impact on investor interest and the amount of money the firm raises. Investor interest in shares is maintained by a reasonable price that strikes a balance between supply and demand. Underpricing may cause the company to raise less money than necessary while overpricing may turn away potential investors and result in under-subscription.

Methods of Pricing an IPO

Two main methods of IPO pricing that are used by a company going public are as follows:

1. Fixed Price Issue

In the case of a fixed price issue, the company sets a predetermined price at which the shares are offered to the public investors. This price is based on the company’s valuation, which considers future growth prospects and market conditions. Investors can subscribe to the IPO at this specific price.

2. Book-Building Issue

In the book-building method, the company provides a price band, and investors can place their bids within that band. The final price is determined by the demand for shares during the IPO subscription period. If demand is high, the price will settle at the higher end of the band. If demand is lower, the price could settle near the lower end.

Factors Influencing IPO Pricing

Here are all the factors that affect the price of an IPO:

• Market Sentiment: Investor confidence in the market can drive up demand, leading to a price increase.
• Company Valuation: The financial health and business prospects of the company play a direct role in determining the price.
• Industry Trends: The industry in which the company operates influences investor interest. Positive market trends draw in additional investors since they indicate financial success. 
• Demand-Supply Dynamics: If the company is expected to perform well, more investors will want to subscribe, pushing the price higher due to increased demand.

Benefits of IPO Subscription

One of the key determinants in IPO pricing is the level of IPO subscription. Subscription refers to how many investors are applying for the available shares. If the IPO is oversubscribed, meaning more shares are requested than available, the price tends to be at the upper end of the price band.

Investors keen on participating in an IPO should keep an eye on subscription levels, as high demand indicates popularity. However, high subscription levels may also mean fewer shares are allotted to each investor.

How to Open a Demat Account with Zero Brokerage

To invest in an IPO, a Demat account is mandatory. A Demat account holds your shares electronically and allows you to apply for IPOs hassle-free. Today, most brokers offer the option to open a Demat account with zero brokerage, reducing the cost of brokerage fees and enabling you to keep more returns.

• Select a Broker: Choose a broker who allows opening a demat account with zero brokerage fees.
• Submit the Account Opening Form: Visit the website, click the “Open Demat Account” form, and submit the details.
• Provide Details: Put in your contact details, such as your name, email address, and phone number.
• Complete KYC: For KYC verification, upload the required paperwork, such as your PAN card, Aadhaar card, and bank account details.
• E-sign: Examine the application, then sign it online.
• Get Account Details: You will receive your account details to begin trading after verification.

After the IPO is priced and shares are allocated, the company’s stock is listed on stock exchanges like BSE or NSE. The allocated shares will be added to your demat account.

Conclusion

Understanding how an IPO is priced is essential for making informed investment decisions. Whether through a fixed-price issue or a book-building process, the level of IPO subscription, market sentiment, and company valuation play crucial roles. To participate in future IPOs, opening a Demat account with zero brokerage can help reduce costs and maximize your investment potential.