Why is the IPO Process So Baroque?

The Initial Public Process is one of the best exit routes for private investors. Sometimes even the promoters of the company switch their roles in order to exit from the company. They transfer/sell their rights and hold to another partner and exit. However, retail investors know only a little of the entire scenario. They know what the marketing team of the company tells them. 

Irregularities In The IPO Process 

The securities market is equal for everyone. A 90-year-old and an 18-year-old come together under a single screen to trade in financial securities. Similarly, the process of investing in an IPO is standard for every investor. The website to check IPO allotment status is the same for everyone. One thing where retail investors lack behind is the amount of capital. If investors or traders have less amount of capital then the chances of getting duped are high. 

Once the stock gets listed on exchanges and is available on trading portals, it is impossible to artificially inflate or deflate the prices. When a company is not trading on exchanges, prices can fluctuate overnight. High net worth investors and institutional investors can buy or sell shares of a company till the last day. This can put retail investors in danger and even a fundamentally strong company can open at a discount. On the other hand, a fundamentally weak company can open at a high premium. When the shares are not trading in the live market price rigging becomes easier.  

Grey Market Premiums 

A Grey market is a place where offline shares are bought and sold. After the shares get allotted, trading in the grey market begins. Grey market is an illegal market which is also called a parallel market. The shares start trading as soon as the subscription begins. 

The grey market premium or the GMP is an appreciated price at which shares are traded in the parallel market. For retail investors, GMP is one way to know whether an IPO will open at a premium or a discount. 

Since it is an illegal market it is needless to say that there is a guarantee that GMP is the right indicator. It is leaked information that flows around the market. Trading in this market is done verbally; there are no exchanges and counters with bidders. 

The subscription rate of the IPO company is one factor to decide GMP. If shares are oversubscribed then GMP would be higher. On the other hand, if shares are under subscribed from initial shares up for sale, GMP would be lower. 

How To Apply For IPO? 

It is the most frequently asked question among stock market trainees. The majority of beginners start their investing journey by applying for an IPO. IPOs are considered as one of the best ways to earn money in the secondary market. A demat and trading account is mandatory to invest in the securities market. 

What Is A Demat Account? 

The basic use of a demat account is to electronically store financial instruments. Demat accounts can be used to store and transfer all kinds of financial instruments. All types of asset classes can be stored in a single demat account. 

What Is A Trading Account? 

Traders use a trading account to place buy and sell orders online. Investors can buy and hold IPO allotment shares in the demat account. To sell them in the market they would require a trading account. It is impossible to sell allotted shares in the security market without a trading account. 

To Sum Up 

IPO allotment procedure is algorithmically driven. The algorithm decides who should be allotted with shares and who should not be. This ensures a fair and transparent environment.  

Also read:- What Is A Brokerage Account And How Do I Open One

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By Cary Grant

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