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Why Should You Not Invest In An IPO? – Kuvera

initial-public-offering

Primary and Secondary Market

 

Before we dive deep into the working structure of an Initial Public Offering (IPO), let’s first understand what primary and secondary markets are. The capital market represents the “Primary Market” and the “Secondary Market”. Both are the two interrelated and inseparable components of the capital market. The capital market is a marketplace for the trade of debt and equity instruments and their derivatives-like options. In this market, financial instruments comprising both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. The capital market can be further divided into primary and secondary markets. In the primary market, securities are offered to the public for subscription for the purpose of raising capital or funds. A secondary market is an equity trading avenue in which already existing/pre-issued securities are traded amongst investors.

 

 

What Is An IPO?

 

An IPO means an Initial Public Offering. It is the process by which a privately owned company becomes a publicly traded company by selling its shares to the public. The sale of securities to the general public on the primary market is known as an Initial Public Offering (IPO). 

 

An IPO is a crucial stage in a company’s development. It allows a company to obtain funds through the public capital market. An IPO also significantly boosts a company’s reputation and media exposure. An IPO is frequently the sole option for financing significant growth and advancement. 

 

A company may have very few stockholders before an IPO. Founders, angel investors, and venture capitalists are a few examples. An IPO is when a company offers its shares to the general public. You can acquire shares directly from the company to join as a shareholder. Through the IPO process, companies can raise equity capital by issuing new shares to the public.

 

How Is The IPO Allotment Process Executed?

 

The company initially searches for underwriters or investment banks to begin the IPO process in India. Mostly, companies prefer to take services from more than one investment bank. The company’s management team will review the company’s assets, liabilities, and financial situation before formulating a plan to meet its financial requirements. The underwriters act as intermediaries between the corporation and its investors. The underwriting agreement will then be signed and will include the following:

 

 

An IPO, or initial public offering, is the process by which a privately held company, or a company owned by the government, raises funds by offering shares to the public or to new investors. Following the IPO, the company is listed on the stock exchange.

 

While coming up with an IPO, the company has to file its offer document with the market regulator, the Securities and Exchange Board of India (SEBI).

 

The company submits a draft prospectus, which is required by the Companies Act. It’s also referred to as a “Red Herring Prospectus” (RHP). All required disclosures required by the Securities and Exchange Board of India (SEBI) and the Companies Act are included in this prospectus. The essential elements of RHP are as follows:

 

 

SEBI then confirms whether the company disclosed all relevant information or not. As soon as the application is approved, the company can reveal the date of its IPO. However, approval from SEBI does not guarantee that the facts/data represented in the offer document are correct or not. 

 

The company must send an application to the stock exchange in order to sell its first stock.

 

The corporation wants to generate excitement in the market before an IPO opens for public subscription. Before the IPO officially opens on the stock exchange, it will be promoted by firm leaders who will promote the impending IPO around the nation. In order to draw new investors, it uses marketing and promotional strategies. They also use different methods that are easy to understand, such as Q&A sessions, group meetings, multimedia presentations, online virtual roadshows, and more.

 

 An Initial Public Offer (IPO) is the sale of securities to the public in the primary market. There are two types of public issues: either a fixed-price IPO or a book-binding offer. In a fixed-price issue, investors are informed in advance of the price at which shares will be sold and allotted. Whereas, in a book-building issue, the issuer offers a 20% range within which investors can bid for the shares. The final price is decided only after the bidding has closed. 

 

During the bidding process, bidders must also submit their offers according to the company’s lot pricing.  The offer document will have details of the book building process, including lot size, maximum bids allowed, etc., which tells them how many shares they need to buy at least.

 

The company also offers the IPO floor price, which is the lowest bid price, and the IPO cap price, which is the highest bid price, respectively. The IPO subscription period typically lasts for three to five business days. Investors can therefore take advantage of the option to apply for the IPO through authorized banks and brokerage firms. The price at which the issue is finally sold is called the “cut-off price.”

 

The underwriters and stakeholders determine how many shares each investor will receive after the company sets the IPO price. Unless IPOs are oversubscribed, investors typically receive all securities. Their Demat account receives credit for the shares. The company’s IPO will begin trading on the stock market once the securities have been allotted. 

 

What Is The Purpose Of An Initial Public Offering?

An initial public offering (IPO) is the first time that shares of a company are made available to the general public. For a variety of reasons, companies seek an IPO to raise capital. Whatever the reason, the overall objective of an IPO is to raise the company to new heights and boost its profitability.

 

 

 

 

 

Why Should You Avoid IPOs Despite The Market Hype?

The safest and best way to invest is thought to be through initial public offerings (IPOs). This isn’t always the case, though. IPOs frequently fall short of the pre-launch promises they made. IPOs are regularly exaggerated. Here are a few reasons why you should not invest in IPOs:

 

 

 

 

 

 

You must also be conscious of the risks involved and the fact that not every IPO will result in profits if you are investing in them out of peer pressure or a fear of missing out. 

 

FAQ’s

 

You must conduct thorough research on the company and its prior performance before investing in an IPO. Although it is available in the company’s prospectus, understanding it requires effort and time. Here are a few points an investor should check out in a real draft red herring prospectus:

 

 

 

 

 

 

Key IPO risks to know while investing:

 

No assurance that you’ll get the shares: It must be taken into consideration that the biggest risk involved in applying for an IPO is that you may not be allotted the shares. There is no assurance of returns in terms of shares or any other type of allocation, so it might very well be viewed as an offering procedure.

 

Getting a lower price than the offered rate: When you buy Pre-IPO shares, you run the risk of receiving less than you invested.

 

External influences can affect the price: The price of a stock going public is set in consultation with one or more investment banks.  These investment banks are employed by and paid by the company that is going public. The offer price should ideally be based on the company’s valuation, which is determined by projecting the company’s financial future. Whether this valuation is reasonable and an accurate representation of the future growth of the company is hard to judge for individual investors who are unaware of its future plans

 

Yes, one can suffer losses while you plan for an IPO investment anytime. When you purchase Pre-IPO shares, there is a chance that you will get back less money than you put in. This is due to the fact that the actual price of Pre-IPO shares is only established after they are listed, and there are numerous instances when the stated price of the share ends up being less than the purchase price. If this happens with the company you chose, you will lose the money you put down as a deposit.

 

An IPO investment does appear glamorous and is interesting to discuss. But if you are unaware of the realities, it might be challenging. The four reasons why you should avoid IPOs are :

 

Interested in how we think about the markets?

 

Read more: Zen And The Art Of Investing

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