The Initial Public Offer

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.

Book Building Process:
Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

Cut-Off Price:
In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock.

Floor price:
Floor price in case of book building is the minimum price at which bids can be made.

Price Band:
The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The cap should not be more than 120% of the floor price. The price band can also be revised. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.

Normal public issue:
In this issue, Price at which securities will be allotted is known in advance to investor. The demand is known only at the close of the issue. The normal public issues are not followed now a day.

Minimum No of Days:
The book should be kept open for at least three days.

Grade:
Is another important criterion to be considered for an IPO. The grade is nothing but the rank given to the Issuer by the third party companies like Standard & Poor, Moody’s... Etc.

These are the information to be known while applying for an IPO.

Fundamentals about Stocks

In order to enter into the stock investments, as an investor you need to know some fundamentals about the stocks. Some of the basic fundamentals about the stocks are discussed below:

Face value of a stock:
The nominal or stated amount (in $) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate; the face value is usually a very small amount ($ 5, $ 10) and does not have much bearing on the price of the share, which may quote higher in the market, at $ 100 or $ 1000 or any other price.

Equity Capital
Total equity capital of a company is obtained by multiplying the total number of shares with its face value. For example, in a company the total no of equity shares are 20, 00,000 units of $ 10 each. Then the equity capital of the company is $ 2, 00, 00,000.

Issue price:
The price at which a company's shares are offered initially in the primary market is called as the Issue price. When they begin to be traded, the market price may be above or below the issue price.

Market Capitalization:
The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue, is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is $ 100. The market capitalization of company A is $ 12000 million.

Thus some basic knowledge about stocks is mandatory for the investors to invest in the stocks.

Basics of Investment

What is an Investment? The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle, you may like to use savings in order to get the return on it in the future. This is known as Investment.

One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is not only to meet the
Cost of Inflation but also to beat it. Inflation is the rate at which the cost of living increases. Inflation causes money to lose value because it will not allow you to buy the same amount of a good or a service in the future as it does now or did in the past. For example, if you buy a product worth $100 and the inflation rate is 6%. For the next year the purchase cost of the product would be $106. Consider if there was a 6% inflation rate for the next 20 years, a $ 100 purchase today would cost $ 321 in 20 years (cumulative). This is why it is important to consider inflation as a factor in any long-term investment strategy. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. So be careful with the inflation and invest wisely.

Different Kinds of Stock Issues

Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below:

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.

A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.

Rights Issue is an issue of securities when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.

A Preferential issue is an issue of securities or of convertible securities by a listed company to a select group of persons, which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

Investment Options

There are various options available for the investments .It depends up on the mentality of the investor. You have to be aware of the fact that most investments are risk in nature. To be precise, one may wish to invest in

• Physical assets like real estate, gold/precious metals, commodities etc.

• Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/hedge/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

The investment options can also be classified based on their time span as given below:-

 Short term: includes savings bank account, money market/liquid funds , stocks and fixed deposits with banks

 Long term: includes real estate, Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc.

The investment should be made in cautious mode. In the investment world there is one standard rule that if your age increases the risk in your investments should be reduced. That is the risk in your investments is inversely proportional to your age. Let’s see some of the risky investments. The investments which inherit the risks in their nature are stocks, real estate, commodities, company deposits and precious metals. Some of the risk free investment options are fixed deposits with bank, money market or liquid funds, government bonds and debentures. So it’s up to the investors to choose between the various options available in the investments.

The Role of Primary Market

The securities market in general can be classified in to two. They are

Ø Primary market
Ø Secondary market

Let’s see the roles and functions of the primary market. The primary market provides the channel for sale of new securities. The primary markets in other words acts as a bridge between the securities issue and the securities exchange. Primary market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation.

They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. Most organizations are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. This is where the primary markets play a considerable role.

The Stock Exchanges

The stock exchange can be technically defined as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the Business of buying, selling or dealing in securities. What got confused..? In simple words, Stock exchange is a place where the exchange of securities takes place. The securities are nothing but Shares, Government Securities, Derivative products, Units of Mutual Funds etc. The stock market ensures transparency involved in the trading. The stock market index is a measure of performance of the economy.

The history of stock exchanges goes back deep in to 11th century. It is believe that the first stock market was established in Cairo, Egypt. From there the stock markets have been evolved and constantly upgraded to match the needs of the various investors. The Amsterdam Stock Exchange is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The developments in the field of stock exchanges have been remarkable. In the later centuries, the stock markets of the developed economies were famous. Such markets are placed in USA, Germany, UK, France and Japan. Now it’s time for the stock exchanges in the emerging markets such as China, Brazil, Russia, India and South Africa to get flourish. The world’s famous stock exchange is NASDAQ located in Times Square, New York City.