IPO GMP Guide: Simple Explanation of IPO, FPO, Allotment & More

Many beginners feel lost when they hear terms like IPO, FPO, IPO GMP, and allotment. These concepts are often mixed up, even though each one has a different meaning and a different role in the stock market. This guide is designed to simplify everything for you – in clear, everyday language – so you finally understand how these terms connect and how to use them confidently in your investment journey.

What Is an IPO? (Initial Public Offering)

Simple Definition – What is IPO?

In simple terms, an IPO (Initial Public Offering) means a private or government-owned company is going to list its shares on the stock exchange for the very first time. After the IPO, the company becomes “public,” allowing anyone to buy or sell its shares openly in the market.

Why Companies Launch an IPO?

A company grows with the help of early investors – founders, angel investors, venture capitalists, corporations, or sometimes even government support.
But when the company reaches a larger stage and needs additional money for:

• Expansion into new markets
• Scaling operations
• Launching new products
• Repaying debt
• Strengthening financial stability

…the existing funding often becomes insufficient.
This is when the company decides to launch an IPO, raise big capital from the public, and get listed on the stock exchange.

Quick Example

Imagine a fast-growing IT company valued at a certain amount. The founders and early investors hold all the shares. Now, to expand faster – maybe launch new technology, increase manpower, or enter new cities – the company needs more funds.

According to SEBI rules, the company must offer at least 10% of its shares to the public to get listed.
So, for the first time, the company sells a portion of its ownership to retail investors, institutional investors, and the general public.

This first-time sale of shares is called an IPO.

What Is an FPO? (Follow-On Public Offering)

Easy Definition – What is FPO?

A Follow-On Public Offering (FPO) happens after a company is already listed on the stock exchange. In an FPO, the company or its existing shareholders issue additional shares to raise more capital from the public.

There are two types of FPO:

1. Dilutive FPO

The company issues new shares, increasing the total number of outstanding shares.
This may dilute (reduce) the value or ownership percentage of existing shareholders.

2. Non-Dilutive FPO

No new shares are created.
Instead, existing shareholders – usually promoters or early investors – sell their own shares to the public.
Since the total share count does not change, there is no dilution.

Why Companies Launch an FPO?

A listed company may choose an FPO for several reasons:

• To raise additional capital for expansion
• To improve financial stability
• To reduce debt
• To meet regulatory requirements
• To increase public shareholding

In simple words, FPO helps a company get more funds after its IPO journey has already begun.

Small Example

Let’s understand this with a simple example:

Company ABC is already listed on the stock market with 1,00,000 shares. Now, ABC needs more capital for expansion.

The company has two options:

Dilutive FPO

ABC issues 20,000 new shares, increasing the total share count to 1,20,000. This brings in fresh money but slightly dilutes the ownership of current shareholders.

Non-Dilutive FPO

Instead of creating new shares, promoters decide to sell 20,000 of their existing shares to the public.
The total number of shares in the market remains 1,00,000, so no dilution happens.

In both cases, the company successfully raises funds or increases liquidity – but the method and impact differ.

IPO vs FPO: Key Differences

Understanding the difference between IPO vs FPO helps investors make better decisions, especially when evaluating risks, pricing, and market behavior. Below is a clear and simple comparison:

Comparison Table: IPO vs FPO

Which Is Safer for Beginners?

For new investors, FPOs are generally safer because the company is already listed, transparent, and has a market track record. IPOs can offer higher listing gains but carry higher risk due to uncertainty and lack of historical performance.

What Is IPO GMP? Meaning & Why Investors Check It

Simple Definition of GMP (Grey Market Premium) – What is IPO GMP?

IPO GMP (Grey Market Premium) refers to the unofficial price difference between a company’s IPO issue price and the price at which its shares are traded in the grey market before official listing.

In simple words:
GMP tells you how much higher (or lower) the IPO shares are expected to list compared to their issue price.

For example:

• If an IPO is priced at ₹100,
• And in the grey market it trades at ₹150,

Then IPO GMP = ₹50.
This indicates the expected listing price may be around ₹150 – although it is not guaranteed.

The grey market itself is an informal, unregulated market, not monitored by SEBI.
Trades happen privately through unofficial dealers, based purely on trust.
Because it is unregulated, investors should understand both the opportunities and risks before relying on GMP.

How IPO GMP Is Calculated? (With Example)

Grey Market Premium (GMP) = Grey Market Price – IPO Issue Price

Example:

• IPO Issue Price = ₹100
• Grey Market Price = ₹150

GMP = ₹150 – ₹100 = ₹50
This means investors expect a potential listing gain of ₹50 per share.

Why IPO GMP Goes Up or Down?

Several factors affect the movement of IPO GMP:

1. Market Mood

If the market is volatile, bearish, or full of uncertainty, investors become cautious.
This leads to a drop in IPO demand, which directly reduces the IPO GMP.

2. Oversubscription

When an IPO receives huge demand – especially from QIBs, NIIs, and retail investors – its GMP generally rises because expectations of strong listing gains increase.

3. Industry Trend

If the company belongs to a sector that is currently performing well (IT, pharma, defence, renewable energy), the GMP tends to go up.
If the industry is struggling or bearish, the GMP usually falls.

4. Company’s Financial Performance

Investors closely check the company’s “report card”:

• Revenue growth
• Profitability
• Debt levels
• Last 3 years’ performance

A financially strong company often attracts more demand, which increases its IPO GMP. Weak financials create doubt, reducing the GMP.

How IPO Allotment Works? (Simple Breakdown)

Understanding the IPO allotment process helps investors know what happens after applying for an IPO and why shares are not always guaranteed — especially in oversubscribed issues.

Step-by-Step IPO Allotment Process

1. Apply for the IPO
   You apply through your broker, bank, or UPI-based apps using an ASBA-enabled Demat account.
2. Applications Collected by Registrar
   After the IPO closes, the registrar gathers all applications from retail, institutional, and non-institutional investors.
3. Oversubscription Check
   If demand is higher than available shares, the IPO is considered oversubscribed.
4. Allotment via Lottery System (Retail Category)
   In case of oversubscription, IPO allotment for retail investors is done through a computerized lottery system to ensure fairness.
5. Refund or Share Credit
   • If shares are allotted → money is debited and shares are credited to your Demat account.
   • If not allotted → blocked funds are released back to your bank account.

IPO Allotment Example (Easy to Understand)

Suppose you apply for 1 lot in an IPO.

• The IPO is oversubscribed 20 times in the retail category
• This means demand is 20× higher than available shares
• Your chance of allotment becomes 1 out of 20

If you win the lottery → shares are allotted
If not → your money is fully unblocked

Quick Takeaway

IPO allotment is not guaranteed, especially in highly oversubscribed IPOs. The lottery system ensures fair distribution, and your money remains safe through the ASBA process.

What Is SME IPO? (Beginner-Friendly Explanation)

Simple Definition — What Is an SME IPO?

An SME IPO (Small and Medium Enterprises Initial Public Offering) is when a small or medium-sized company raises money from the public by issuing shares for the first time and gets listed on a dedicated SME platform of the stock exchange.

In simple words, an SME IPO works like a normal IPO, but it is meant for smaller companies that want funds to grow, expand operations, meet working capital needs, or repay debt — before they become large businesses.

Listing through an SME IPO also improves the company’s credibility, visibility, and future growth opportunities.

How SME IPO Differs from Mainboard IPO?

Here’s how an SME IPO is different from a regular (Mainboard) IPO:

• Issue Size: SME IPOs are smaller in size
• Company Scale: Meant for small and medium enterprises
• Risk Level: Generally higher due to limited history
• Liquidity: Lower trading volumes compared to mainboard stocks
• Listing Platform: Listed on SME exchanges like NSE SME or BSE SME
• Regulatory Requirements: Simpler listing rules than mainboard IPOs

Should You Invest in an SME IPO? (Pros & Cons)

Before investing in an SME IPO, it’s important to understand both the opportunities and the risks.

Pros of SME IPO

• High Growth Potential:
  Smaller companies can grow faster if their business model succeeds.
• Portfolio Diversification:
  SME IPOs allow exposure to emerging businesses and new sectors.
• Early Entry Advantage:
  Early investors may benefit if the company expands rapidly or later shifts to the mainboard.

Cons of SME IPO

• Higher Risk:
  Many SME companies are still in early growth stages and may be affected by market or economic changes.
• Lower Liquidity:
  SME IPO shares may not trade frequently, making it harder to sell quickly.
• Limited Public Information:
  These companies often have a shorter financial history, making detailed analysis challenging.

Quick Takeaway

SME IPOs can offer high returns, but they also come with higher risk. They are best suited for investors who understand small businesses, have a higher risk appetite, and invest with a long-term perspective.

How to Use IPO GMP Before Investing? (Practical Guide)

IPO GMP Is an Indicator, Not a Guarantee

It is important to understand that IPO GMP is not legally authorised or regulated information.
IPO GMP is an informal market indicator that circulates through market participants, dealers, and investor sentiment.

Because it is unofficial and unregulated, IPO GMP should never be the only reason to invest.
Smart investors use GMP only as a supporting signal, while making decisions based on the company’s financial strength, business model, and long-term potential.

👉 In short: IPO GMP shows market expectations, not certainty.

What Else to Check Along With IPO GMP?

Before applying for an IPO, always evaluate these key factors along with GMP:

• Company Revenue Growth
  Check whether revenue has consistently increased over the last 3 years or is declining.
• Promoter Holding
  Higher promoter shareholding generally indicates confidence in the company’s future. Very low promoter holding can be a red flag.
• Industry Outlook
  A strong and growing industry increases the chances of long-term success.
• Subscription Numbers
  High demand from QIBs, NIIs, and retail investors often reflects strong market confidence.
• Valuation
  Even a high GMP is risky if the IPO is overpriced compared to peers.

Real-Life Example — Understanding IPO, FPO & IPO GMP Together

Let’s understand everything with a simple real-life style example:

XYZ Ltd. launches an IPO offering 1,00,000 shares at an issue price of ₹100 per share.
The allocation is divided as:

• QIB: 50%
• NII: 35%
• Retail: 15%

One lot contains 150 shares.

Financial Strength

XYZ Ltd. shows strong fundamentals:

• Assets and income are increasing
• PAT, EBITDA, and net worth are improving
• Reserves and surplus are growing
• Borrowings are decreasing

Because of these strong financials, investors gain confidence in the company’s future.

IPO GMP Movement

With:

• Strong company fundamentals
• Positive industry trends
• Supportive market mood

The IPO GMP starts rising, reflecting high demand and positive listing expectations.

What Happens Next? (FPO Scenario)

After 2 years of strong performance, XYZ Ltd. expands its business, launches new products, and aims to reduce existing debt.
To raise more capital, the company issues 25,000 additional shares through an FPO.

This shows how:

• IPO helps a company enter the market
• IPO GMP reflects early market sentiment
• FPO supports further growth after listing

Key Takeaway

IPO GMP helps you understand market expectations, but fundamentals decide long-term success.
The best investment decisions are made when IPO GMP + financial strength + industry outlook align together.

FAQs (Short, Simple & SEO-Friendly)

Q1. What is IPO GMP and how is it calculated?

Ans. IPO GMP (Grey Market Premium) is the unofficial price difference between an IPO’s issue price and its grey market trading price. It is calculated by subtracting the IPO issue price from the grey market price and helps investors gauge expected listing sentiment.

Q2. Is GMP always accurate for predicting listing gain?

Ans. No, IPO GMP is not always accurate. It reflects market expectations, not certainty. Factors like overall market mood, global events, company fundamentals, and listing-day volatility can affect the final listing price, even when GMP is high.

Q3. How does IPO allotment happen?

Ans. IPO allotment is handled by the registrar after the issue closes. If the IPO is oversubscribed, shares are allotted through a computerized lottery system in the retail category. If not allotted, blocked funds are released back to investors’ bank accounts.

Q4. Is GMP legal in India?

Ans. GMP is not illegal, but it is unofficial and unregulated. It does not fall under SEBI’s regulatory framework. Since grey market trading operates informally, investors should use IPO GMP only as an indicator and not as a guaranteed signal.

Q5. Should beginners invest in IPOs?

Ans. Yes, beginners can invest in IPOs to understand how the process works, but they should start carefully. Instead of relying only on IPO GMP, beginners should focus on company fundamentals, valuation, and industry outlook before applying.

Conclusion: Understanding IPO GMP Makes Investing Simpler

IPO, FPO, IPO GMP, SME IPO, and allotment may look confusing at first, but once you understand the basics, they become quite simple. The key to smart investing is not following hype or rumours, but looking at company fundamentals, market conditions, and long-term potential. When you combine knowledge with patience, your investment decisions automatically improve.

Want more simple and practical financial guides? Explore our investment section and keep learning.