How to Bid for an IPO – Tips and Tricks
An Initial Public Offering (IPO) is the process through which a company issues its shares to the public for the first time. If you’re planning on investing in an IPO of a company, you need to first know how IPO bidding works. This will help you make a better and more informed investment decision. But before we go ahead and take a look at how to bid in an IPO, let’s take a look at the different kinds of Initial Public Offerings that you’re likely to encounter in the Indian stock market.
Are All IPOs the Same?
No. Not all IPOs are the same. Initial Public Offerings are classified into two types - book-built IPO and fixed-price IPO - depending on the pricing method adopted by the company.
Book-Built IPO
In this type of IPO, the price at which the shares are to be issued to the public is discovered using the book-building process. The company provides investors with a price range. The lowest price in the range is known as the floor price, whereas the highest price is known as the cap price. Based on the number of bids received, the company sets the cut-off price. Only those investors who bid on or above the cut-off price are eligible for allotment of shares.
Fixed-Price IPO
In a fixed-price IPO, however, the company sets a single specific price. Unlike a book-built IPO, there’s no bidding process in a fixed-price IPO. Investors desirous of subscribing to the company’s shares are required to apply at the specified IPO price.
How to Bid for IPO: The Basics
It is important to get the basics right before you learn how to bid in an IPO. One of the most important prerequisites for investing in an Initial Public Offering is the demat account. Without an active demat account, you cannot invest in the Indian stock market, let alone an IPO.
To open a demat account, all you need to do is reach out to a reputed Depository Participant (DP) such as Mirae Asset Capital Markets (India) Private Limited. Once you open an account, you can then proceed to apply for an IPO.
Additionally, you would also need a bank account since the IPO application process in India follows the ASBA (Application Supported by Blocked Amount) protocol. When you apply for an IPO, the respective amount in your bank account is blocked temporarily till the time of allotment. If the shares are allotted to you, the blocked amount is automatically debited from your account. If you don't get the shares allotted, the blocked funds are released and made available to you.
Read Also: Top 10 IPO Investment Tips and Strategies
The Bidding Process
Now that you’re aware of the basics let’s take a look at how to bid for an IPO. There are four key things that you need to keep in mind when applying for an IPO. Let’s take an in-depth look at each one of them.
How Much To Bid?
You can only apply for an IPO in lots. The company, along with its Book Running Lead Managers (BRLMs), set the minimum lot size. For instance, if the lot size is 100 shares, you would have to bid for a minimum of 1 lot (100 shares) or in multiples thereof.
Also, there’s another major factor you need to consider. There are three categories of IPO investors - retail investors, non-institutional investors (NIIs) and Qualified Institutional Buyers (QIBs). Applying under the retail category is often ideal since the chances of getting shares allotted to you are higher.
However, to apply under the retail category, your total bid value should not exceed ₹2 lakhs. If you plan on bidding for more than ₹2 lakhs worth of shares, you can only do so under the non-institutional investor (NII) category.Where To Bid?
You can bid for an IPO online through your stockbroker’s trading portal. Alternatively, some scheduled commercial banks enable you to apply for an IPO online through their Internet banking portal as well. On the other hand, you may also subscribe to a public issue offline by submitting a filled IPO application form at any of the specified bank branches or your stockbroker’s branch.
What Price To Bid At?
Bidding for an IPO at the right price is very important. Here’s one of the best IPO tips and tricks that you can use. Always place your bids at the cut-off price. As you’ve already seen above, companies will only consider bids that are on or above the cut-off price. Therefore, by placing your bids at the cut-off price, you can increase the chances of getting allotted.
How To Bid Online?
Now that you’ve seen a couple of IPO tips, let’s take a look at how to bid for an IPO online.
Step 1: Log into your stockbroker’s trading portal.
Step 2: Navigate to the IPO section of the portal.
Step 3: Choose the public issue that you would like to invest in.
Step 4: Enter the details of the IPO, such as the number of lots you wish to apply for and the price. Remember to select the ‘cut-off price’ option to increase the chances of allotment.
Step 5: Complete the UPI mandate registration process.
Step 6: Submit the IPO application.
Keep in mind that the steps outlined above are only meant to be illustrative. The process flow may vary slightly depending on the stockbroker you’re associated with.
IPO Bidding Aftermath - Understanding IPO Allocation
It is worth noting that the IPOs, by their nature, attract many people and this can lead to a competitive bidding process. The inability to get shares, especially in the case of a highly anticipated IPO often occurs due to high demand compared with supply.
So as a result, you may end up getting less or no shares at all contrary to what you expected while making your bid for IPO. In such cases of non-allotment, the bank refunds the amount placed into the bid.
Therefore, coping after an IPO bid requires one to be patient and have a good understanding of market dynamics. It can be frustrating when fewer or no shares are received than expected; but it’s normal in IPO investing. Therefore, maintaining a diversified investment approach would help protect against allocation outcomes.
Conclusion
Now that you know how to bid for an IPO, make sure to use this knowledge the next time you apply for one. That said, make sure to first open a trading and Demat account before you proceed to invest in the Indian stock market.
m.Stock offers a robust trading and Demat account with zero brokerage trades on equity delivery, mutual funds and IPOs. Thanks to a super-fast and paperless onboarding process, you can have your account open in no time. Furthermore, with m.Stock, you can apply for all the latest public issues through a seamless and secure 1-click process.
Read Also: How to check IPO Allotment Status?
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FAQ
Is it necessary to add a nominee in the demat account?
While it is not necessary, it is highly recommended to add a nominee in your demat account. This ensures that the securities in the account will be transferred smoothly and swiftly to the nominee in the unfortunate event of the account holder's death or incapacitation. In accordance with SEBI rules, the primary account holder needs to declare whether they wish to add a nominee or not. If yes, then the requisite nominee details such as name, age, relationship, etc. need to be added.
How many nominees can be added to one demat account?
The rules state that you can add up to 3 nominees for each demat account. You also get the opportunity to distribute the holdings by percentage to avoid disputes and complications later on. For example, split 50-50 between 2 nominees or a different appropriation of your choosing. Naturally, in the case of a single nominee all your securities are transferred to them.
Who can you appoint as a nominee for your demat account?
A nominee for a demat account is a person designated by the account holder to receive the securities held in the account in the event of the account holder's death. The nominee can be anyone, such as a family member, friend, or any other individual. To appoint a minor as nominee, the account holder needs to provide the details of the guardian as well. Non-individuals, associations, or corporations cannot be appointed as a nominee.
What if a demat account has no nominee?
The primary purpose of adding a nominee is to ease the share transfer process. By appointing one or more nominees (and declaring the percentage distribution) shareholders can ensure their nominees get the securities upon the shareholder’s unfortunate demise. In the absence of a nominee in a demat account, the process of transferring securities can become more complicated and time-consuming. In certain cases, a legal process may be required to confirm the status of the heir and establish the legal ownership of the securities held in the account.
Is a nominee mandatory for demat accounts?
No, it is not mandatory to appoint a nominee in a demat account. However, as per SEBI rules, it is mandatory to declare if you do not wish to add a nominee by filling the requisite form. Download the DECLARATION FORM FOR OPTING OUT OF NOMINATION - ANNEXURE B Not having a nominee can make the transfer of ownership of securities rather complicated, in case of the account holder’s death. Adding a nominee ensures that the rightful heirs get their due with fewer hassles and complications.
Does the nominee become owner of shares?
No, a nominee is the person designated by the account holder to receive the securities held in the demat account in case of the account holder's death. The nominee has no ownership rights before this event. In case of the account holder's death, due process is followed and the shares can be transferred to the nominee or other legal heirs as per the account holder's will and/or declaration.