What Is Lot Size In An IPO?

When a private company offers its shares to the public for the first time through an Initial Public Offering (IPO), it opens the door for investors of all scales to participate. IPOs allow you to invest in companies that show strong growth potential, and understanding the lot size is an essential step in making informed investment decisions.

The lot size is the fixed number of shares an investor can apply for in a single bid when a company goes public. When minimum and maximum investment limits are defined, it becomes easier for you to plan your budget and application strategy. Knowing the IPO lot size helps you calculate how much to invest and improves your chances of securing the shares you want.

Introduction To Lot Size In IPO

When buying an IPO, one of the most important things to think about is the lot size, often overlooked. The lot size is the maximum number of shares that a person can buy at once. Instead of letting candidates choose any number of shares, companies set a lot size that they must stick to. For example, if the lot size is 100 shares, an investor cannot request 75 or 125 shares.

The purpose of this system is to make sure that all investors are treated fairly and to speed up the distribution of resources. No matter how much or how little you know about trading or investing, you need to know how the lot size in an IPO works to make money with your investments.

Why Lot Size Matters In IPOs

There are several reasons why the lot size in an IPO is important. Below are a few of them:

• Defines Your Minimum Investment – The lot size determines the smallest amount of money you need to participate in an IPO, helping you assess if it fits your budget.
• Helps Plan Capital Allocation – By knowing the lot size, you can plan how much capital to set aside and decide whether to apply for multiple lots within the maximum limit.
• Improves Allotment Strategy – Understanding the lot size allows you to structure your applications more effectively, which may increase your chances of allotment.
• Controls Demand and Supply – Lot sizes are set to balance demand among retail and institutional investors, ensuring fair participation.
• Simplifies Application Process – With fixed lot sizes, the bidding process becomes standardised, making it easier for you to apply.
• Reduces Administrative Complexity – It helps the issuing company and regulators manage applications efficiently by keeping share requests in uniform quantities.

Minimum vs. Maximum Lot Size

Before investing in an IPO, you must be aware of the minimum and maximum lot sizes and the differences.

The minimum lot size in an IPO is the fewest shares that can be bid on at once. That's the first place anyone who wants to invest should go. Regulators like SEBI (Securities and Exchange Board of India) advise businesses to keep the minimum lot size in IPO small so that more people will invest in them. The minimum lot value is usually between ₹10,000 and ₹15,000, but it can change based on the stock's value and cost.

The maximum lot size in an IPO, on the other hand, demonstrates to investors that in a certain group how many shares they can bid on when an IPO happens. According to SEBI, Indian retail investors can only put in a maximum of ₹2,00,000 in an IPO. The price of each lot determines how many lots can be sold. If each lot is worth ₹15,000, a retail investor can apply for up to 13 lots. The answer is 1,95,000, which is 15,000 times 13.

High-net-worth and institutional investors may have different or no limits, but the average investor needs to know the smallest and largest lot sizes to make smart financial choices.

How Lot Size Is Decided

The company that issues the IPO, the lead managers (merchant bankers), and regulatory bodies like SEBI all have a say in the size of the lot. There were a number of reasons for this choice few of which are given below:

• Stock Price Band: A company sets the prices for the shares it sells when it goes public. It is important to change the lot size so that SEBI's rules still let you invest the minimum amount.
• Market Sentiment: When the market is unstable, companies may lower the minimum lot size in an initial public offering (IPO) to attract more small investors.
• Target Audience: A big company might offer bigger lots to get people to buy its stock. If a tech startup wants regular people to buy its stock, it might sell smaller lots.
• Company Valuation: The price of each share could go up if the company is worth more. After that, the company could sell fewer shares to lower the price of each lot.

The lot size should be accurate so that things are easy to get to and resources are used wisely. That's why the IPO is good for both the company and the investors.

How To Calculate Minimum Investment

If you know the lot size and price range, it's easy to figure out how much money you need to put into an IPO. This is how to do it:

Minimal Investment = Lot Size × Issue Price

To help you understand this better, let's look at an example.

For instance, a business might sell its first shares to the public IPO for between ₹100 and ₹105. The smallest lot size is 135 shares.

The most the investor would have to pay if they bid at the top of the band ₹105 is:

135 shares × ₹105 = ₹14,175

This is the least amount of money you need to buy a lot and take part in the IPO. If an investor wants to buy more than one lot, like three, the total would be 135 shares × 105 × 3 = ₹42,525.

This calculation, which uses the maximum lot size from the IPO restriction, helps investors figure out how many lots they can afford to apply for and get their money in order.

Implications For Retail vs. Institutional Investors

For retail investors, understanding the minimum lot size in an IPO is crucial, as it directly indicates the minimum amount of capital required to participate. If the lot value increases, smaller investors may hesitate to apply due to higher entry costs. Additionally, retail investors are capped at a maximum investment of ₹2,00,000 in an IPO, which limits the number of lots they can apply for. This makes it important to calculate precisely how much the application will cost before bidding.

Interestingly, applying for fewer lots can sometimes increase your allotment chances. In many IPOs, the number of applicants far exceeds the shares available under the retail quota. Since allotment is often done via a lottery system, those who apply for the minimum lot may have a better probability of securing shares.

Institutional investors, on the other hand, operate under different conditions. Categories like Qualified Institutional Buyers (QIBs) are not bound by the same maximum lot restrictions as retail participants. If the IPO size and share availability are large enough, they can bid for shares worth crores. Rules for institutional allotments vary between IPOs, and in most cases, their bids have a higher likelihood of acceptance due to the larger quota and demand-based allocation.

In short, understanding lot size is essential for both retail and institutional investors. For retail participants, it’s about budgeting and maximising allotment chances within investment limits. For institutions, it’s about leveraging flexibility to secure larger allocations in promising offerings.

Tips For IPO Applicants

For investors aiming to make the most of IPO opportunities, understanding the dynamics of lot size can offer a competitive edge. Here are some practical tips:

• Stay Updated on Issue Details: The red herring prospectus (RHP) will always have the most current information on the size of the lot, the price range, and the application deadlines.
• Apply at Cut-Off Price: Retail investors should think about applying at the cut-off price to make it more likely that they will get an allocation without having to worry about price changes.
• Open More Than One Demat Account: If you're applying with family members, each of them should have their own accounts with different PANs. This way, you can ask for more lots without breaking SEBI's rules.
• Avoid Overspending: If you want to stick to your budget, don't buy more than the retail IPO lot size limit. No matter how many times you try, it won't work.
• Watch for GMP Trends: The Grey Market Premium (GMP) could mean that more listings are coming. But don't just believe what the company says; also think about what it stands for.
• Ensure Sufficient Funds: You need to have enough money in your bank account to cover the blocked amount when you apply for ASBA (Application Supported by Blocked Amount).

If you know the lot size and follow these rules, you can take part in an IPO with more confidence and wisdom.

Conclusion

In short, all types of investors should understand the lot size in an IPO. It helps determine how much capital to allocate and significantly impacts share allotment. Both the minimum lot size in IPO that fits your budget and the maximum lot size in IPO that manages your risk are critical. The lot size guides investors in making informed, balanced decisions. Since Initial Public Offerings remain a popular way to enter equity markets, knowing how lot size in an IPO works, whether you're a cautious retail investor or an aggressive institutional buyer, can directly influence your financial outcomes.

Also Read: 8 Tips to Increase Your Chances of IPO Allotment