Introduction
One of the most anticipated stock market events is an Initial Public Offering (IPO). An IPO is a process through which a private company issues its shares to the public for the first time. It marks a company’s transition from a private entity to a publicly traded company.
While an IPO helps a company raise capital for its various needs, it can also be a rewarding opportunity for investors. Investing in an IPO allows you to own a piece of a company and be a part of its growth endeavor.
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As a retail investor, you can participate in a company’s IPO by placing a bid for its shares and waiting for the allotment. But what happens to your money once you bid for an IPO? Do you get your money back if shares aren’t allotted to you? Keep reading to find answers to your questions.
What happens to your money once you bid for an IPO
To bid for an IPO, you must have a bank account and a Demat account with a Depository Participant (DP).
After deciding to apply for a company’s IPO, you need to apply to your bank or broker. Under the Application Supported by Blocked Amount (ASBA), the bid amount is blocked in your bank account once your application is submitted. You cannot use these funds till the IPO allotment process is complete. However, you keep earning interest on it.
All applications are checked and registered once the IPO bidding period is over. Bids that are correctly submitted are accepted or disqualified. Now the company and its underwriters evaluate the share demand and decide the price at which they will be issued.
If the number of qualified applications is equal to or less than the number of shares available, complete allotment of shares happens. It means you are allotted the same number of shares you bid for. After allotting shares, the blocked amount is debited from your bank account, and your money is used to buy the shares.
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What happens to your money when an IPO is oversubscribed
IPOs of eminent companies can get oversubscribed. It means the demand for their shares can exceed the total number of shares available.
If the bids received are a bit higher than the shares issued, bidders in the retail category get at least one lot of shares. An amount equivalent to the allotment is debited from the blocked funds, and the remaining funds are released.
You might also not get any shares, and the entire amount is refunded to you. This happens when a company’s IPO demand is much higher than the shares issued. An unbiased lucky draw system is used for allotment in such a scenario.
Conclusion
What happens to your money once you bid for an IPO ultimately depends on the outcome of the IPO process. If your bid is successful and you are allotted all the shares you have bid for, your money is debited from your bank account. On the other hand, your money is refunded to you if you are allotted less or no shares. Further, the value of your investment can fluctuate according to the market conditions and the company’s performance once shares are listed on the stock exchange.
Hence, IPOs are not guaranteed success. It is essential to research the company you want to invest in thoroughly. Assess the company’s goals, financial performance, competitive advantages, and more before committing money. Also, ensure you have a Demat account to bid for an IPO.
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