IPO: Initial Public Offering

Priyanka Sharma

05 Aug 2017

IPO definition
IPO means Initial Public Offering. Initial Public Offering (IPO) is the way an organisation goes public, lists itself on the exchanges and sells share to raise capital. In other words, it is a process by which a privately held company becomes a publicly traded company by offering its shares to the public for the first time. A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the stock exchange.
 
How does a company offer IPO?
A company before it becomes public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, along with the underwriting agreement, they file the registration statement with SEBI. 
SEBI scrutinizes the disclosed information and if found right, it allots a date to announce the IPO.

Why does a company offer an IPO?
1) Offering an IPO is a money-making exercise. Every company needs money, it maybe to expand, to improve their business, to better the infrastructure, to repay loans etc.
Trading stocks in the open market mean increased liquidity. It opens door to employee stock ownership plans like stock options and other compensation plans, which attracts the talents in the cream layer.
2) A company going public means that the brand has gained enough success to get its name flashed in the stock exchanges. It is a matter of credibility and pride to any company.
3) In a demanding market, a public company can always issue more stocks. This will pave the way to acquisitions and mergers as the stocks can be issued as a part of the deal.

Should you invest in an IPO?

Deciding whether to put your money into an IPO of a relatively new company is indeed tricky. Many people say having a cautious approach is a positive attitude to have in the stock market. By participating in an IPO, an investor can buy shares before they are available to the general public in the stock market. However, in case of an IPO, an investor will have to buy shares directly from the companies. 
For any company, IPO launch is one of the biggest events in its history. The company puts in maximum efforts to ensure that the IPO launch is a success. They spend heavily on advertisements in maximum possible available media platforms. A sizeable number of investors get informed about an IPO launch from advertisements or other media formats. Most of the activities are to purely promote the upcoming IPO and do not offer the complete picture. So as an investor before you opt for any IPO, it is imperative that you acquaint yourself with important information regarding company, financials, expansion plans and more. Few things to be considered before investing in an IPO are as follows:

1) Background checks
The Company obviously does not have enough historical data to back your decision, because it is just going public now. The red herring is the data on the IPO details which is provided in the prospectus, you need to scrutinize it. Know about the fund management team and their plans of IPO generated fund utilization. Look at the valuation of the company, is the price offered in the IPO, match with its fair value? This may be the hardest to determine for retail investors, but possibly the most important. Valuation refers to the relative price at which an IPO is offered. So, if the offer price of an IPO is Rs.500 per share, the price is arrived at after valuing the company’s revenues, profits and taking into account cash generation and debt in the balance sheet.
The process can be highly technical but can come with a shot of bias as investment bankers judge the “quality” of management and earnings before arriving at the final offer price.
For investors, these details are too complicated and their best bet is to compare the valuation of an IPO stock with a listed peer in the secondary market. In case, the IPO is that of a new business and there are no comparable listed peers, you have to judge using simple valuation techniques like price to earnings ratio, price to book ratio and return on equity.

2) Who is underwriting
The process of underwriting is raising investments by issuing new securities. Be careful of the underwriting of small investment banks. They may be willing to underwrite any company. Usually, an IPO with a success potential is backed by big brokerages that have the ability to endorse a new issue well. This does not mean that, the big investment banks never bring duds public, but in general, quality brokerages bring quality companies public. Exercise more caution when selecting smaller brokerages, because they may be willing to underwrite any company.

3) Lockup periods
Often IPO takes a deep downtrend after the IPO goes public. The reason behind this fall of the share price is the lockup period. A lockup period is a contractual caveat which refers to a period of time the company’s executives and investors are not supposed to sell their shares. After the lock-up period ends, the share price experiences a drop in its price.     

Once you have decided to participate in a particular IPO, then the question arises how does one go about it?

1) Apply using Application Form

Aspiring investors need to fill up the application form that is available with brokers or agents who sell mutual funds. These application forms are free of cost. When you fill up the form ensure that the details are legible and accurate. Also, attach a cheque for the amount of shares you wish to buy. There is always a minimum number of shares you have to buy, which is as defined by the company. Following the mentioned activities, submit the form with the mentioned time-frame.

2) Apply Online 

You can also apply for an IPO online through ASBA (Applications Supported by Blocked Amount). SEBI developed this process to leverage online option. Through ASBA, investors money doesn’t get debited till shares are allotted. In addition, investor can login to their respective netbanking account and apply for IPOs directly.
 
Do remember, a lot of companies launch its IPO; however, it is not necessary that it will perform well. It is therefore imperative to thoroughly check and evaluate a company, its financials, its future plans before investing in its IPO. If you blindly invest, there is probability that you will end up with losses. 

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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IPO: Initial Public Offering

Priyanka Sharma

05 Aug 2017

IPO definition
IPO means Initial Public Offering. Initial Public Offering (IPO) is the way an organisation goes public, lists itself on the exchanges and sells share to raise capital. In other words, it is a process by which a privately held company becomes a publicly traded company by offering its shares to the public for the first time. A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the stock exchange.
 
How does a company offer IPO?
A company before it becomes public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, along with the underwriting agreement, they file the registration statement with SEBI. 
SEBI scrutinizes the disclosed information and if found right, it allots a date to announce the IPO.

Why does a company offer an IPO?
1) Offering an IPO is a money-making exercise. Every company needs money, it maybe to expand, to improve their business, to better the infrastructure, to repay loans etc.
Trading stocks in the open market mean increased liquidity. It opens door to employee stock ownership plans like stock options and other compensation plans, which attracts the talents in the cream layer.
2) A company going public means that the brand has gained enough success to get its name flashed in the stock exchanges. It is a matter of credibility and pride to any company.
3) In a demanding market, a public company can always issue more stocks. This will pave the way to acquisitions and mergers as the stocks can be issued as a part of the deal.

Should you invest in an IPO?

Deciding whether to put your money into an IPO of a relatively new company is indeed tricky. Many people say having a cautious approach is a positive attitude to have in the stock market. By participating in an IPO, an investor can buy shares before they are available to the general public in the stock market. However, in case of an IPO, an investor will have to buy shares directly from the companies. 
For any company, IPO launch is one of the biggest events in its history. The company puts in maximum efforts to ensure that the IPO launch is a success. They spend heavily on advertisements in maximum possible available media platforms. A sizeable number of investors get informed about an IPO launch from advertisements or other media formats. Most of the activities are to purely promote the upcoming IPO and do not offer the complete picture. So as an investor before you opt for any IPO, it is imperative that you acquaint yourself with important information regarding company, financials, expansion plans and more. Few things to be considered before investing in an IPO are as follows:

1) Background checks
The Company obviously does not have enough historical data to back your decision, because it is just going public now. The red herring is the data on the IPO details which is provided in the prospectus, you need to scrutinize it. Know about the fund management team and their plans of IPO generated fund utilization. Look at the valuation of the company, is the price offered in the IPO, match with its fair value? This may be the hardest to determine for retail investors, but possibly the most important. Valuation refers to the relative price at which an IPO is offered. So, if the offer price of an IPO is Rs.500 per share, the price is arrived at after valuing the company’s revenues, profits and taking into account cash generation and debt in the balance sheet.
The process can be highly technical but can come with a shot of bias as investment bankers judge the “quality” of management and earnings before arriving at the final offer price.
For investors, these details are too complicated and their best bet is to compare the valuation of an IPO stock with a listed peer in the secondary market. In case, the IPO is that of a new business and there are no comparable listed peers, you have to judge using simple valuation techniques like price to earnings ratio, price to book ratio and return on equity.

2) Who is underwriting
The process of underwriting is raising investments by issuing new securities. Be careful of the underwriting of small investment banks. They may be willing to underwrite any company. Usually, an IPO with a success potential is backed by big brokerages that have the ability to endorse a new issue well. This does not mean that, the big investment banks never bring duds public, but in general, quality brokerages bring quality companies public. Exercise more caution when selecting smaller brokerages, because they may be willing to underwrite any company.

3) Lockup periods
Often IPO takes a deep downtrend after the IPO goes public. The reason behind this fall of the share price is the lockup period. A lockup period is a contractual caveat which refers to a period of time the company’s executives and investors are not supposed to sell their shares. After the lock-up period ends, the share price experiences a drop in its price.     

Once you have decided to participate in a particular IPO, then the question arises how does one go about it?

1) Apply using Application Form

Aspiring investors need to fill up the application form that is available with brokers or agents who sell mutual funds. These application forms are free of cost. When you fill up the form ensure that the details are legible and accurate. Also, attach a cheque for the amount of shares you wish to buy. There is always a minimum number of shares you have to buy, which is as defined by the company. Following the mentioned activities, submit the form with the mentioned time-frame.

2) Apply Online 

You can also apply for an IPO online through ASBA (Applications Supported by Blocked Amount). SEBI developed this process to leverage online option. Through ASBA, investors money doesn’t get debited till shares are allotted. In addition, investor can login to their respective netbanking account and apply for IPOs directly.
 
Do remember, a lot of companies launch its IPO; however, it is not necessary that it will perform well. It is therefore imperative to thoroughly check and evaluate a company, its financials, its future plans before investing in its IPO. If you blindly invest, there is probability that you will end up with losses. 

Have Referral Code?