Don't Buy IPO Stocks!!
When a company wants to expand its business, it needs money to fund it expansion. An Easy source of capital is borrowing funds from bank at an interest.
However, borrowing from bank has two major disadvantage.
First, capital borrowed from banks is bears an interest, which has to be paid on a monthly basis irrespective of whether the company is making a profit or not. Secondly, If a company requires really huge capital, lending such a huge capital to a single entity exposes banks lending portfolio to a huge risk, which a bank may not be willing to take.
To solve this problem, IPOs were introduced, where a company can give away a part of ownership (that is a Share) in business to general public in exchange for money.
The advantage of this system is that companies can raise capital, (especially large sums) without any obligation to pay regular interest, and investors of IPO(that is general public) get capital appreciation(appreciation in share price) at a higher rate than offered by a fixed income instrument.
Secondly, investors are also rewarded by frequent dividend payouts. A dividend is a part of companys annual profit that it decides to share with its shareholders.
Dividends are given on the face value of the share(which is usually Rs.
10 per share) and are distributed to shareholders on a per share basis.
For example, if a company has decided to give 100% dividend to its shareholders, it means, the company will distribute Rs.10 per share to each shareholder. So if you have 100 shares of the company, you will get Rs.1,000 as dividend (10*100=1,000).
Since we have understood the IPOs let us now understand the mechanism behind IPOs, and how they are issued: