Some investor keeps asking questions like what is Initial Public Offering (IPO)? or what does IPO stand for? and how to buy an IPO stock? So, in this article, I’ve covered all the aspects relating to Initial Public Offering (IPOs).
Initial Public Offering definition
An initial Public Offering or IPO means that a private company goes public to raise funds. In other words, a private company going public for the first time to sell its stock.
Definition of Stock, Equity, and Shares
A stock (also known as equity) is a security that represents the ownership of a fraction of a company. The owner of these shares has ownership in the company itself as well as its profits and assets depending on how many stocks they happen to own. The unit value of a stock is known as “shares”.
What are traded company and public trading?
A traded company is a company that is owned by shareholders. It can be traded by its shareholders in the stock market. A public company is a company that issues its equity shares to the general public. It can be traded by anyone. The best example is Google. Google is traded company that also happens to be a public trading company.
What is IPO in the share market?
IPO is a process by which companies first offer their shares to the general public. It is a process in which the ownership of the company is legally transferred from the person(s) forming the company (e.g., the first shareholders) to the investing public.
It differs from privately held corporations in that the company is owned by a very large number of people. The owners are still called shareholders. The company is still governed by its board of directors, who are elected by the shareholders, but the shareholders do not have any right to make decisions about company operations.
Initial Public Offering Example
Initial Public Offering Process
The Initial Public Offering process is where the company first registers itself with the Security Exchange Commission (SEC). Next, the company and its advisers decide on the number of shares to be sold and at what price.
The company will then lay out timetables for the offering, and the SEC will review and approves the IPO registration. Finally, the company will sell the stock to the public, and the shares can be traded on the stock exchange.
The recently concluded financial year 2021-22 has been the best for Initial Public Offering (IPO). Various companies have raised Rs.1,20,670 crore with it, and it is a record for the market to date. Never before has this much money been raised in an IPO. However, last year was the worst for IPO investors.
Some of the new stocks in the IPO saw a significant erosion. Out of the new stocks that came into the listing, 32 stocks added Rs. 34,327 crores, but there were also 19 stocks whose prices fell below the listing, and an Erosion of Rs 24,582 crore took place. Overall, the money invested in IPOs has attracted investors’ profit by roughly around Rs 10,000 crore.
Paytm’s Initial Public Offering- a fiasco?
Last year, Paytm’s IPO raised Rs. 18,300 crore, and is a record amount for India’s stock market. But at the time of listing, the company’s stock fell by more than 75 percent, leaving investors with a worth of Rs. 14,000 crore loss. It is understandable that after the IPO, the share price will fall by 10-15 percent, but a fall of 75 percent is unacceptable.
|Upcoming IPO name||IPO Price (In crore)||Year|
|Rainbow Childrens Medicare Ltd||1600||2022|
|Campus Activewear Ltd||1400||2022|
|Bharat FIH Limited||5000||2022|
|Gemini Edibles & Fats India Ltd||600||2022|
|Life Insurance Corporation of India (LIC IPO)||50000||2022|
|Go Airlines (India) Ltd||3000||2022|
|ESAF Small Finance Bank Ltd||1000||2022|
|Studds Accessories Limited||450||2022|
IPO Companies (upcoming IPO NASDAQ)
|1Sharpe Acquisition||NASDAQ||$ 10.00||22,500,000|
|11 ABR||NASDAQ||$ 10.00||–|
|5G Edge Acquisition||NASDAQ||$ 10.00||30,000,000|
|Acamar Partners Acquisition II||NASDAQ||$ 10.00||35,000,000|
|Acies Acquisition II||NASDAQ||$ 10.00||25,000,000|
|Aeon Acquisition||NASDAQ||$ 10.00||12,500,000|
|Altamont Pharma Acquisition||NASDAQ||$ 10.00||10,000,000|
|Apex Technology Acquisition II||NASDAQ||$ 10.00||30,000,000|
|Apollo Strategic Growth Capital III||NASDAQ||$ 10.00||35,000,000|
6 Amazing tips for Initial Public Offering investment
1. Do some research on the new Initial Public Offering
Before investing in a company that has an IPO, think about the company’s operations and think about where the business and profits will come from. If we take the example of Paytm, the company did not have enough strength to have a high valuation.
It was a loss-making company. In a way, his business model was fragile—however, rumours circulated about his IPO that many investors invested in it and eventually gave up.
Do you remember the case of Reliance Power? Its IPO in 2008 was Rs.405, and it sold at more than 73 times its offering price. Eventually, there was a crash in the price. Today, the share price is around Rs. 14.
Of course, it doesn’t seem easy to do enough research on an IPO company or its fundamentals, especially for small investors.
2. Don’t trust the broker blindly
One thing is for sure since brokers get a commission in investing money in IPOs, they will always present a glowing picture of IPOs. How does their business work if no one buys from them? Investors need to be careful about this aspect.
The temptation to make money is widespread, especially when the booming stock market. Brokers take advantage of this. Moreover, especially the young investors who have come into the market are unaware that many people have faced tough times by investing in big IPOs in the past. Between 1995 and 2000, about 2500 technology companies came up with IPOs.
Today only 10 or 12 of these companies exist. We should never invest in an IPO driven by appearances and with the feeling that everyone has earned, and we have left behind.
3. Understand the Company’s vision
The critical issue is what the company that came up with the IPO will do with the money it receives. It is a good sign if the company wants to invest this money in business expansion as it shows that there is much scope for growth in its business. The company may use the money from the IPO to set up a new factory.
Offer sales often have a high share in a company’s IPO. It means that the people who have invested in it right now, like the promoters, want to release their money. It may be that the company’s business is not doing well, and the original investors want to get out of it. In such a case, small investors should be warned.
4. Never underestimate the Grey Market
People familiar with stock market movements know that most investors invest in IPOs to sell stocks at a reasonable premium when listing and thus make huge profits in the short run. Before listing, investors are often tempted by the high price of such stocks in the unauthorized market (grey market). But it is better to stay away from such temptations. Shares of every IPO are not necessarily listed at a high price.
The current example of Paytm shows the same thing. It also happens that even if the listing is done at a high price, then the share price starts falling. The greedy investor either sells the shares at a loss or retains the shares of such unscrupulous companies for years. In both cases, the loss is on the investor.
5. IPO is not the only option for share market investment
Investors caught in the lure of IPOs need to know that according to statistics, not only are most of the IPOs in the last ten years trading now, but many companies have disappeared.
One thing to understand is that IPO is not the only option to make money in the stock market. There are also many stocks in the secondary market in which investing can benefit you.
The advantage of investing in such stocks is that the company has been in the market for some time, and much information is available. Shares of many such companies are now available at reasonable prices and could rise sharply in the future.
6. Change before the change
Investors also need to change their routines with the changing situation. Sometimes, some companies are affected due to new laws or new technology. It is advisable to get out of such an investment quickly. You may recall that some brokers changed their minds after Paytm’s IPO. Under such circumstances, a company’s share price that was once considered vital may break down.
Now, you understand what are IPOs all about and why it’s an attractive option for private companies. It provides them with a chance to raise capital and grow their business. It also offers investors an opportunity to make money.