Types of Investors In IPO

An initial public offering (IPO) is the process of selling shares of a privately held company to the public for the first time. Companies often use IPOs to raise capital, and they are typically underwritten by investment banks.

By the end of this article:

• You shall have a brief idea on IPO
• Different types of investors who invest in IPO
• Purpose of different investors who invest in IPO

Benefits of investment in IPO 

An initial public offering, or IPO, can be a great opportunity for investors to get in on the ground floor of a new company. An initial public offering (IPO) is a type of public offering in which company shares are sold to investors. 

There are several benefits to investing in an IPO. 

• An IPO can be a way to invest in a growing company. When you invest in an IPO, you are essentially buying shares of a company as they become public. If the company grows well, you enjoy the fruit of the right investment decision. 
• An IPO is a good way to diversify your portfolio. When you buy stocks in different companies, your investment can provide a boost if one of the companies does well and falters if another company has problems. 
• Public offerings are relatively easy to invest in. One benefit is that IPOs tend to be underpriced. This means that there is potential for the stock price to go up once trading begins. This can lead to quick profits for early investors. 
• IPOs offer investors a chance to diversify their portfolios. By investing in an IPO, investors can add a new company and sector to their portfolio without selling any existing holdings. 
• Lastly, investing in an IPO can be a way to support companies that you believe in. 

Disadvantages of investing in IPO 

Investing in an IPO can be a high-risk investment. When a company goes public, it sells shares of itself to the public for the first time. This means a lot of uncertainty surrounds the company and its future. The company may not be well-established and may not have a track record of success. There is also the chance that the company will not be able to meet the high expectations that investors have for it. This can lead to the stock price dropping soon after the IPO. A company that is planning to go public registers with SEBI. SEBI will review the company’s financial statements and ensure it has met all of the requirements for an IPO. 

Different types of investors in an IPO

If you’re considering investing in an IPO, it’s important to understand the different types of investors that may be involved. 

1. Institutional Investors:

Institutional investors, a type of investor in IPO, are companies that invest in IPOs through other people’s money. They have a lot more money to invest than individual investors, so their purchases can hugely impact the price of a stock. They include pension funds, insurance companies, and mutual fund companies. Institutional investors typically buy large blocks of shares in an IPO and can therefore exert significant influence on the stock price.

There are many advantages to being an institutional investor. Institutional investors can hold onto investments          for long periods. They also tend to have more information about the company than individuals. And because              they’re investing on behalf of others, they’re usually more disciplined about their investment decisions. All of these factors make institutional investors a powerful force in the market. And for companies looking to go public, courting them can be a key part of a successful IPO.

2. Non-institutional investors(NII) 

Non-institutional investors, a type of investor in IPO, are typically smaller investors who don’t have the same resources as the larger institutional investors. NII are typically large trusts, big companies, and similar institutions that invest more than Rs.2 lakhs. 

Non-institutional investors often don’t have the same amount of money to invest as institutional investors. They also may not have access to the same information and research. 

However, non-institutional investors can still be a valuable part of an IPO. They can provide additional funds and help to create more interest in the company. 

Each investor has a specific purpose, and it is important to know the types of investors before investing in IPO.

3. Individual Investors

Individual investors, a type of investor in IPO, are small-scale investors who buy shares in an IPO for themselves. These are people who invest their own money in stocks. They may buy shares for themselves or someone else, such as a child or grandchild. Individual investors can be High Net Worth Individuals (HNIs) who invest more than Rs.2 lakh. However, compared to institutional and non-institutional investors, they only have a limited impact on the price of the stock. 

4. Retail investors

Retail investors, a type of investor in IPO, are small investors who invest less than Rs.2 lakhs. They are called retail because they invest for their own personal reasons, not on behalf of corporations or other large investors. Although their actions can influence the price of a stock, they are likely to have the least influence. 

5. Insider investors

Insider investors, a type of investor in IPO, are people who work for the company that is going public. They may be executives or employees with access to information about the company that others don’t have. Insider investors may significantly impact a stock’s price if they buy or sell shares. 

The different type of investors in IPO holds specific purpose, which is why it is essential to comprehend the different types of investors. 

6. Anchor investors

Anchor investors, a type of investor in IPO, are a type of institutional investor that commits to investing a large sum of money in a company, usually at the time of the company’s initial public offering (IPO). Anchor investors are typically well-established investment firms with a history of successful investments.

The purpose of an anchor investor is to provide stability to a new issue and help attract other investors. By committing to invest a large sum of money, anchor investors signal to the market that they believe the company is a good investment. This can help attract other institutional and retail investors, who may not have been as willing to invest in the company without the anchor investor’s commitment. Anchor investors typically receive favourable terms from the issuing company, such as a lower price per share or additional shares not available to other investors. 

Conclusion 

When it comes to investments, there is no one-size-fits-all approach. Each type of investor has different needs and goals and therefore requires a different strategy. The article provides a brief on the different types of investors in IPO, and each investor holds a specific strategy for investment.

Frequently Asked Questions (FAQs) :

Q. Who are retail investors? 

 A retail investor is an individual who purchases security for their own personal account, as opposed to buying on behalf of another party. Retail investors typically have a smaller investment budget, and they can invest a maximum of Rs. 2 lakhs in an IPO. 

Q. What is the difference between a retail investor and an individual investor? 

 Individual investors are the composite group that consists of both retail and HNI investors.  

 Q. What is the difference between an institutional investor and an individual investor? 

 Institutional investors are organisations that pull money from many sources and invest it in various assets. This can include pension funds, insurance companies, hedge funds and investment banks. Institutional investors usually have a team of professionals who research investments and decide where to put the money. 

 Individual investors are people who buy shares in an IPO for themselves. They may do this through a broker or directly from the company. Individual investors often don't have the same resource as institutional investors.  

 Q. What is the difference between an institutional investor and a non-institutional investor? 

 Institutional investors are typically large organisations like insurance companies, pension funds etc. They have professional money managers who make investment decisions on behalf of the investor. Because they are investing in other people's money, they tend to be more risk-averse than individual investors. 

 Non-institutional investors, a category of IPO investors, are frequently smaller investors with fewer resources than the bigger institutional investors. NII are often sizable trusts, significant businesses, and other organisations investing over Rs. 2 lakh.

 Q. What is the minimum investment for an IPO? 

 The minimum investment for a retail investor depends on the minimum lot size and price band.  

 Q. What is the maximum investment for an IPO? 

 The maximum investment for an IPO for a retail investor is Rs. 2 lakhs.