Quick Answer: How Does an IPO Work?
An IPO (Initial Public Offering) is the first time a private company sells shares to the public and lists on a stock exchange. These seven terms cover most of what a first-time applicant needs to know:
- Price band
- The range within which the final issue price is decided, for example ₹100 to ₹106 per share.
- Lot size
- The fixed minimum number of shares you must apply for; you can only apply in multiples of one lot.
- Cut-off price
- An option that lets retail investors accept whatever final price is discovered within the band.
- ASBA / UPI mandate
- Your application amount is blocked in your bank account, not debited, until allotment is decided.
- GMP (Grey Market Premium)
- An unofficial, unregulated price for IPO shares before listing. It is informal chatter, not a reliable prediction.
- Allotment
- When the retail category is oversubscribed, shares are allotted by a computerised lottery, not first-come-first-served.
- RHP (Red Herring Prospectus)
- The offer document with the company's financials, promoter background and how the IPO money will be used.
What you will learn
- How an IPO application works step by step, via UPI and ASBA
- How price band, lot size and cut-off price decide what you pay
- What GMP really is and why it should never be your main reason to apply
- How allotment and investor-category quotas work
- What to check in the RHP before you apply
What Is an IPO and Why Do Companies Launch One?
An IPO (Initial Public Offering) is the first time a private company sells shares to the public, becoming a listed company on a stock exchange afterward. Before the IPO, ownership sits with founders, promoters, and early private investors; after it, anyone with a demat account can own a piece of that business.
Companies launch IPOs primarily to raise capital — to expand operations, repay debt, fund acquisitions, or simply give early investors and employees an exit route for shares they've held for years. For you as an applicant, an IPO is really just a very specific, time-boxed way of buying a stock before it starts trading freely on the open market.
An IPO is not automatically a "discount" or a guaranteed bargain just because it's new. The price is set by the company and its bankers based on what they believe the market will pay — sometimes conservatively, sometimes aggressively. Treat an IPO the same way you'd treat any other stock purchase: on its own merits.
Types of IPO Issues
Not every IPO is structured the same way. Two distinctions matter most for a first-time applicant: how the price is decided, and which market segment the company is listing on.
| Type | Fixed Price Issue | Book Building Issue |
|---|---|---|
| How price is set | Company fixes one exact price upfront | Company sets a price band; final price is discovered from bids |
| What you do | Apply at the one stated price | Bid within the band, usually at the cut-off price |
| How common today | Relatively rare for mainboard IPOs now | The standard approach for most modern IPOs |
Separately, IPOs are also split by market segment: Mainboard IPOs are larger, more established companies listing on the main NSE/BSE platforms, while SME IPOs are smaller companies listing on the dedicated SME segment, typically with higher minimum investment amounts and different liquidity characteristics. If you're applying to your first IPO, mainboard issues are the more beginner-friendly starting point.
How to Apply for an IPO
Nearly all retail IPO applications in India today go through the ASBA (Application Supported by Blocked Amount) system via UPI. The process is simpler than it sounds: your money is blocked, not withdrawn, in your own bank account until allotment is finalised.
Visualising It: The IPO Application Journey
From tapping "Apply" to shares actually landing in your demat account.
The whole application typically takes under two minutes — the only real time pressure is approving the UPI mandate notification promptly once it lands in your banking app, since it usually expires after a set window.
Understanding Price Band, Lot Size & Cut-off Price
Three terms show up on every IPO application screen, and confusing them is one of the most common beginner mistakes:
- Price Band — the range within which the final issue price will be decided, for example ₹100 to ₹106 per share.
- Lot Size — the fixed minimum number of shares you must apply for, set by the company; you can only apply in multiples of one lot, not any arbitrary quantity.
- Cut-off Price — an option that lets retail investors agree to pay whatever final price is discovered within the band, rather than locking in a specific bid — the recommended choice for most retail applicants, since it maximises your allotment chances without meaningfully changing what you pay.
Multiply the lot size by the upper end of the price band to estimate roughly how much money will be blocked in your account when you apply.
What Is GMP (Grey Market Premium) — And Why You Shouldn't Trust It Blindly
GMP is an unofficial, informal price at which IPO shares change hands before listing, quoted in an unregulated grey market that operates outside SEBI's oversight. It is not published or verified by any exchange or regulator.
A high GMP is often read as a sign of strong listing-day demand, and a low or negative GMP as a warning sign — and directionally, it's sometimes right. But GMP is also thin, easily influenced by a small number of trades, and known to swing sharply — even reversing — in the final day or two before listing. Treating it as a reliable prediction rather than informal chatter has led plenty of applicants astray, especially those who apply purely chasing a high GMP number without reading anything else about the company.
The more reliable approach: use GMP as one minor data point at most, and put your actual research effort into the company's financials, valuation, and business quality — covered next.
How IPO Allotment Actually Works
When an IPO is oversubscribed in the retail category — meaning more lots are applied for than are available — allotment for retail investors is decided by a computerised lottery system, not first-come-first-served. Applying early doesn't improve your odds; applying correctly does.
Each valid retail application is entered into the draw, and the system allocates available lots at random among eligible applicants. This is exactly why applying from multiple family members' own demat accounts (each with their own PAN) is a legitimate way to improve your household's overall odds — you're simply entering the lottery more than once, through separate, individually valid applications.
Investor Categories and Quota Differences
IPO shares aren't allocated from one single pool — they're typically split across investor categories, each with its own reserved portion of the issue:
| Category | Who They Are | How Allotment Works |
|---|---|---|
| QIB | Qualified Institutional Buyers — mutual funds, banks, FIIs | Proportionate allocation, largest reserved portion on most mainboard issues |
| NII / HNI | Non-Institutional Investors applying above the retail limit | Proportionate allocation among NII applicants |
| Retail (RII) | Individual investors applying up to the retail investment limit | Lottery-based allotment when oversubscribed |
This is also exactly why a headline "IPO subscribed 40 times" figure can be misleading if quoted for the overall issue — subscription levels often vary significantly by category, and it's your own category's subscription number that actually determines your odds.
What to Check in the RHP Before You Apply
The Red Herring Prospectus (RHP) is the company's official, SEBI-mandated disclosure document — long, dense, and skipped by most first-time applicants. You don't need to read all 300+ pages, but checking these sections takes twenty focused minutes and catches most red flags:
Objects of the Issue
Is the money going toward genuine growth (expansion, debt repayment) or mostly toward an "offer for sale" that only benefits existing investors cashing out?
Financial Statements
Look at revenue and profit trends over the last 3 years — consistent growth is a healthier sign than a single good year right before the IPO.
Promoter Background & Litigation
Check the promoters' track record and the "Outstanding Litigation" section for any material pending legal or regulatory cases.
Valuation vs Peers
Compare the P/E ratio the IPO is priced at against similar, already-listed companies in the same industry.
Risk Factors
This section is often skipped, but it's where the company is legally required to disclose its own biggest weaknesses in plain language.
What Happens on Listing Day
If you're allotted shares, they're credited to your demat account before the stock begins trading, typically a couple of working days after allotment is finalised. On the listing day itself, the stock opens at a price discovered by the exchange based on pre-open session orders — this can be well above, at, or even below your issue price, regardless of how strong the GMP looked beforehand.
A common beginner decision point is whether to sell immediately for a listing-day gain or hold for the longer term. Neither is automatically right — a stock that lists at a strong premium can still be a poor long-term hold if the underlying business is weak, and a flat or negative listing doesn't necessarily mean the company itself is a bad one. This is exactly where the RHP research from the earlier step pays off: it's the difference between a decision and a guess.
Common IPO Mistakes to Avoid
Applying purely on GMP hype
Chasing a high grey market number without reading a single page of the RHP is applying blind, not investing.
Missing the UPI mandate approval window
A valid application with an unapproved UPI mandate is treated as if you never applied at all.
Bidding below the cut-off price
As a retail investor, bidding at a lower price within the band, instead of at cut-off, can needlessly reduce your allotment chances.
Applying with someone else's PAN or duplicate applications
Multiple applications under the same PAN in the same category get rejected entirely, not just reduced.
Ignoring the "Objects of the Issue"
An IPO that exists mainly to let early investors exit is a very different proposition from one raising money to genuinely grow the business.
Holding purely out of loss-aversion
Continuing to hold a poor listing simply to "wait for it to recover," without reassessing the business itself, is a decision made from emotion, not analysis.
Your Step-by-Step IPO Application Checklist
Get a demat and trading account with UPI mapped
Make sure your account is active and a UPI ID is linked to it well before the IPO opens — not on the last day.
Read the RHP, not just the news headlines
Spend twenty minutes on the checklist above before deciding whether this IPO is even worth applying to.
Decide your bid price and lot quantity
Bid at cut-off as a retail investor in most cases, and only block funds for as many lots as you can genuinely afford.
Apply and approve the UPI mandate promptly
Submit through your broker, then approve the mandate notification in your banking app as soon as it arrives.
Track allotment status and next steps
Check the registrar's website on the allotment date; shares get credited if allotted, or funds are released automatically if not.
Learn the Stock Market with Deepak Kevadia: Boisar, Dahanu, Palghar & Online
This guide is part of the free learning library from Chart Code, founded and mentored by Deepak Kevadia (BSE NISM Certified). Knowing how an IPO works is step one; learning to read a prospectus and judge a business with a mentor is step two. Chart Code's trading course is taught in person at Boisar and live online, so students from Boisar, Dahanu and Palghar, and anywhere in India, can join.
- In person: 208, Yash Padma Arcade, Boisar Tarapur Road, Boisar, Palghar, Maharashtra 401501
- Online: live sessions from anywhere in India
- Contact: +91 95121 00588 (call or WhatsApp) · chartcode.in@gmail.com
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