Investing in IPOs – fast facts

I came across this post by Saurabh. He give’s a pretty elaborate picture of the basics of an IPO. I found it very interesting. There’s a whole plethora of stuff i have never understood about stocks and trading. His post can sure get one started. ๐Ÿ™‚ Nice read.

I have got calls from at least 4 people asking about Reliance Power IPO. What is different about these calls is that all these 4 people have nothing to do with financial markets and they have been lured by easy money to be made with Reliance Power IPO. There might be many more people like that. Assuming that they are as new to the stock markets as my friends, here is a fast fact guide about IPOs for absolute novices.

IPO refers to Initial Public Offer. In simple terms it means that the company issuing the IPO needs some money for a specific purpose and they are approaching the public to offer shares and get money. For example if Cafe Coffee Day wanted to expand from 500 cafes to 1000 cafes and they needed money for expansion, they could either take a loan or issue an IPO. The objective of IPO would be to raise money to buy stores at premium locations and open new cafes. (And no, Cafe Coffee Day is not coming out with an IPO, thatโ€™s just an example).

Investor categories. There are different types of investors. HNI – High Networth Individuals, FII – Foreign Institutional Investors. Most of the individuals investing their hard earned money would fall under the category of Retail Investors. A retail investor can not invest more than 1 lakh in an IPO.

Demat account: Account for trading shares in dematerialized form. You need to have a demat account to trade in any kind of securities. Demat account with any broker with do. It could be an online trading account or an offline one.

Subscription: Simply put, this is the number times the shares of the company were applied. For example if RPL had 1000 shares in all to offer, and 10,000 people applied, the IPO would be over-subscribed by 10 times. In this case, RPL is offering 260 million shares. If only 260 mn shares are applied for, the IPO would be fully subscribed. If people collectively apply for 520 mn shares, it would be oversubscribed twice. So on and so forth.

Partial Payment: Simply put that for applying to the IPO, you dont have to put 1 lakh (assuming that you are a retail investor). You have to put just 25% or 25000 to apply for shares worth 1,00,000.

Listing Date and Price. Once these applications are made, the company would allot shares in proportion to number of applications. There is a complex formula but for fast facts, lets assume that it is oversubscribed 10 times. Each investor would thus be allotted 100/10% (or 10%) of shares applied for. If you applied for 100 shares, you would get 5 shares if the IPO is over-subscribed by 20 times.

After allocation, these shares would be listed on stock exchanges. Listing simply means that the shares are now available to trade on exchanges. People can buy and sell them in a typical barter manner.

Issue Managers. This is simply the set of bankers that manage the issue. They have nothing to do with allocation, subscription, pricing, buying, selling from a retail investors perspective. They just manage the entire process and in return get a fat fee. Dont be swayed by calls that say that they are the managers and you can only invest if you have a demat account with them.

And in the end, please think hard and consult someone who knows the markets before you invest your hard earned money.

While at it…. Check out the basic tutorial on investing in an IPO @ rediff.

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  1. #1 by SG on January 18, 2008 - 12:52 pm

    Thanks for the kind words ๐Ÿ™‚

    Regards,
    SG

  2. #2 by unnikuttan on January 18, 2008 - 2:06 pm

    great article about ipo. what about the perspectives on ipos at the bse? the markets all over the world are slow but the Indian is ok. it lost about 1000 points this year.

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