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Explained : All about Initial Public Offerings (IPOs)

Stock Market

To begin with, you all might have come across the news of the LIC IPO, which will get listed in a few weeks on the stock exchanges as the buzz for that IPO is being increased day by day. It is because of the popularity of that company. Moving Forward, whenever we talk about this there are a lot of investors/individuals who are unaware of some key terminologies that are a part of this topic. Most of the equities that were launched on the exchange in the years 2020 & 2021 are trading above their issue prices, and several have risen more than 800%. Investing in initial public offerings (IPOs) is an exciting choice for new investors. And therefore, we will be discussing the same in today's piece to get a better understanding of this topic.

What do you mean by Initial public Offerings & How do they differ from Unlisted Securities?

An Initial Public Offering (IPO) is a procedure in which a firm sells its stock to the general public to raise cash. Because both institutional and individual investors can participate in an IPO, investors pay close attention to Initial Public Offering investments. The price of the stock is established by the issue sale during the initial public offering (IPO), which may move up or down depending on investor interest in the company's shares.

Unlisted shares are those that are not traded on a recognized stock exchange, such as the NSE or the BSE, and have no plans to go public in the near future. However, if these firms decide to go public or need to acquire capital, they can issue an initial public offering (IPO).

Key Terminologies used in the process of Initial Public Offerings (IPOs)

1. ASBA-With ASBA, the money paid by investors for stocks remains in the investor's account, but the amount is frozen until the investors' shares are allotted.

2. The Red Herring Prospectus & a DRHP (Draft Red Herring Prospectus) - The Red Herring Prospectus contains all of the information that investors need to know about the firm, such as the company's financial position, management credentials, future strategy, IPO price range, and so on. DRHP (Draft Red Herring Prospectus) must be filed to the Securities and Exchange Board of India (SEBI) 21 days before the IPO.

3. Book Building process - The process of determining the issue price for an IPO based on the prices bid by investors is known as the book-building process.

4. Abridged Prospectus- This is a synopsis of the IPO prospectus that covers all of the primary prospectus's essential features.

5. Price Band - The price range within which investors can bid for IPO shares is referred to as a price band.

6. Oversubscription & Oversubscribed - In the case of an oversubscribed IPO, the additional subscription sum is acquired by the firm. When the Investors bid more than the number of shares recommended by the firm, resulting in an oversubscription.

7. Minimum Subscription—Currently, the minimum percentage of IPO shares that retail investors must subscribe for an IPO to be successful is 90%.

8. Lot Size - The minimal number of shares that can be bid for in an IPO is known as the lot size. If you wish to bid on a larger number of shares, you can do so in multiples.

9. Floor Price & Cut-Off Price  - When applying for an IPO, the floor price is the lowest price per share that may be bid. When a company is listed on an exchange, the issue price is the price at which shares are allotted to investors. The lowest issue price at which shares are allotted is known as the cut-off price

10. Underwriters - Underwriters are investment bankers that oversee the company's initial public offering and book-building process.

11. Offer Date - The offer date is the day on which investors can begin bidding for shares in an initial public offering.

12. Listing Date - The day on which IPO shares begin trading on the stock market is known as the listing date.

Moving forward, An investor needs to check a list of things before investing in an IPO & they are -

a) Understanding the Business Plan: Before investing in an Initial Public Offering, investors need be aware of the company's business model. After they've figured out what sort of business the company is in, the next stage is to spot a new market opportunity. The reason for this is because the size of the opportunity and the company's ability to gain market share may make a significant difference in the company's growth and shareholder returns. If the company's commercial operations are unknown to investors, they should avoid its initial public offering.

b) Company Strengths and Weaknesses: Before investing in a company's Initial Public Offering, one should do a SWOT analysis.  Investors should learn about the company's position in the industry it works in. Attempt to learn as much as possible about the firm from numerous sources, as well as about its strategy, so that investors may assess the company's future possibilities. Investors should also consider the company's prospects, including opportunities and dangers in the industries in which it operates.

c) Investment Horizon: An investor should have a defined investment horizon before investing in an IPO. They should determine if they want to invest in the IPO just for the purpose of trading on the first day of the offering or if they want to keep the shares for a longer period of time. The reason for distinction is because a trading strategy is based on current market conditions, but a long-term plan is based on the company's fundamentals.

d) Reasons for Fund Raising: It is critical to understand how the funds obtained from the Initial Public Offering will be used by the firm. Check to see if the firm intends to pay off its debt or if it plans to raise funds to pay off the debt and develop the business, or to use the funds for corporate reasons. This indicates that the money will be put to good use in the company, which is a positive indicator for investors.

e) Examining the Management and Promoter Background: It is critical to look at who is running the firm because they are its backbone. Investors should pay attention to the company's promoters and managers, since they play a significant part in all of the company's operations and activities. The organization's management plays a critical role in propelling the company forward. Checking the credentials and amount of years spent in the firm by the senior management will give you a sense of the organization's working culture.

f) Company's Valuation & Health : Investors should also look at the company's values because the offer price might be low or overvalued based on the industries in which it operates and the financial statistics. With that, It's crucial to look at the company's financial performance over the last several years to see if its sales or profit is constantly increasing or not. Investing in an Initial Public Offering might be a beneficial investment if the company's sales are expanding. Before investing in an IPO, it is critical for investors to evaluate the company's financial condition.

Lastly, To sum this up it is important to note that be it LIC or any other IPO with a good buzz in the market, an investor must go through this basic points & understand this terminologies in order to get a better understanding of the company raising the funds.

Happy Investing !

- TEAM IFA