Cracking the IPO Code: A 101 Guide
Hey Longterm Squad,
IPOs are again the talk of the market nowadays where many exciting IPOs are making their debut in the stock market.
And looking at the hype of the recent few IPOs I thought it would be a great time for a detailed discussion about IPOs for this week’s Finance Findings Newsletter.
What’s an IPO?
An IPO, or Initial Public Offering, is like a grand opening for a company in the stock market. It’s the moment they go from being privately owned to publicly traded. Why? Well, there are a few reasons, but mainly, companies opt for an IPO to raise funds for growth and expansion.
Offer for Sale vs Fresh Issue – What’s the Deal?
In an IPO, you might come across terms like “Offer for Sale” and “Fresh Issue.” Here’s the explanation:
• Offer for Sale: Think of it as a company’s way of saying, “Hey, we’re selling some existing shares.” It’s like the founders and existing investors cleaning out their investment closet.
• Fresh Issue: This is when the company creates new shares to sell. The money from these new shares goes directly into the company’s balance sheet for future expansions and growth.
Decoding IPO Basics
1. Retail Individual Investors (RII): If you’re an individual investor in India applying for less than Rs 2 lakhs in an IPO, welcome to the Retail category! You get a 35% reservation, and you can bid at the cut-off price.
2. High Net Worth Individuals (HNI): Apply for more than Rs 2 lakhs. You’re in the HNI league. No cut-off bidding for you. You have to bid at a fixed price within the issue price range, and there’s a 15% reservation for you.
3. Grey Market Premium (GMP): Picture this as the stock market’s secret club. Off-the-market deals, and transactions happening before the big listing. The extra cost of these off-market deals? That’s the Grey Market Premium.
How is IPO allotment done?
The following cases are possible:
- Under subscription of shares by less than 90% – The IPO is canceled, and the money received from applicants is returned.
- Subscription of more than 90% shares – Applicants get all the lots they applied for, provided their application is valid.
- Oversubscription of shares – In this case, shares can be allotted either on a proportionate basis or a lottery basis.
The IPOs are a way to get money from the investors from the stock market, and just like you want the best price for your own assets, the company’s promoters and existing investors want the best price for their shares in the company leading to higher valuations.
In the past 7 years, I’ve tried my luck with IPOs only three times.
- Avenue Supermarts (2017): Back in 2017, I was a newbie in the stock market game. A friend’s dad suggested applying for Avenue Supermarts’ IPO (that’s Dmart). It turned out to be a big hit, but, unfortunately, the IPO gods didn’t favor me, and I missed out on the allotment.
- HDFC Asset Management Company (2018): Fast forward to 2018, I had a bit more experience under my belt. I had started decoding company financials, digging into profit and loss statements, and sizing up balance sheets. HDFC AMC’s IPO caught my eye with its solid brand and a booming industry. Excitedly, I applied, but the luck wasn’t on my side, and I didn’t snag an allotment.
- Tata Technology: The most recent attempt was with Tata Technology. I’m pretty optimistic about the Engineering Research & Development (ER&D) and Electric Vehicle (EV) industry. Seeing the already listed players with sky-high valuations, Tata Technology’s IPO seemed reasonably priced. Yet again, despite my enthusiasm, the allotment eluded me.
Seems like Lady Luck isn’t a fan of my IPO adventures. If you’re thinking about testing your luck with IPOs, you’ll need a Demat account. Here’s the link to my preferred broker.
In conclusion, I’d like to emphasize that while IPOs can offer listing gains, substantial profits are often found in the long term when valuations work in your favor. Personally, my preference is for companies to be listed, especially when I find their financials appealing. Given the opportunity by Mr. Market, I choose to accumulate a significant number of shares for the long haul. For me, the stock market isn’t about making quick gains in the short term but building substantial wealth over the long term.
Wishing you investing success,
Pratik Chauhan
Finance Findings Newsletter