IPO is a very big and crucial step for any company. Not only in terms of growth and expansion but also the credibility and share listing affects the company directly or indirectly. But before digging in deeper let us recall some basic terminologies.
What is an IPO?
IPO stands for Initial Public Offering. It’s a process where in a company offers shares to the public to raise capital. An IPO is a big step for a company as it provides the company with access to raising a lot of money. So the company is considered private before listing its shares. However the company can raise funding’s through angel investors, bank loans or friends/family support.
Thus company’s can raise equity capital with the help of IPO’s by issuing shares to the public. The company which offers its shares is known as an ‘issuer’. And the general public who buy the shares are known to be the shareholders of the company.
After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading. You need not worry, we’ll discuss financial markets too! In other words, IPO is the selling of securities to the public in the primary market.
A primary market deals with new securities being issued for the first time. After listing on the stock exchange, the company becomes a publicly-traded company and the shares of the firm can be traded freely in the open market.
Some Important Key Terminologies
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- Price Band: It is the price range within which investors can bid for IPO shares.
- Lot Size: It means the minimum number of shares that one can bid for an IPO.
- Offer Date: It is the starting date on which the investors can start bidding for the shares.
- Floor Price: It is the lowest price per share that one can bid one applying for an IPO.
- Issue Price: It is the price at which the shares are allotted to the investors when it gets listed on the exchange.
- Over Subscription: It is the additional subscription sum that is obtained by the company in the situation of an over subscribed IPO.
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- Listing Date: It is the day on which IPO shares start trading on the stock exchange.
- ASBA- It means ” Application supported by blocked account” . It is an application containing an authorization to block the application money in the bank account, for subscribing to an IPO issue. You cannot use the blocked amount for any purpose. However, you can continue to earn interest in the blocked amount. As an investor, if you apply through ASBA, your money gets debited from your bank account only if your application is selected for allotment. It is refunded to your bank account if you do not get the IPO issue or the issue has been withdrawn. From 2016 onwards, the SEBI has directed that it is mandatory to fill an ASBA form if you wish to invest in IPO.
Factors to consider before investing in IPO’s
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- Company Evaluation – Start with knowing the company, it’s history and present operations. Basically you need to keep up with the company , don’t worry you need not dig deeper with past numbers. Just analyze and review the entire business and it’s operations . The idea behind it is to assess the effectiveness of the company.
- Risk Factors – The financial performance indicates how well a company is performing in terms of revenue , economic strategies , managing debt, liabilities, investment decisions, current profitability and risk.
- Business Model– It is the type of market company is targeting at the moment. The various types of business models are :
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- Financial Performance & Future Prospect– Try checking out the background of the company and answers to common questions like – why did the company came out with the idea of IPO, how will the funds be utilized . Moreover you can always analyze the current financial position of the company and their future course of action. Company’s Website is the best source to find out such information.
- Financial Ratios– strategically you can use ratios to analyze the value of IPO. That will help you in figuring out if the coming IPO is overvalued , undervalued or fairly valued. Formulas like price to earning ratio, debt to equity return, return on equity ratios can be used for the same.
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