Mayur
Member • Sep 26, 2006
All about IPO (initial public offering)
Initial Public Offering (IPO):
A term well heard but seldom understood by most of the people. I came across a post in one of the threads many days back asking for some one to explain what is initial public offering. Well, before I begin, let me tell you that I'm a marketing guy and have no basic qualification in Finance as such. But I keep a keen watch on these things and keep my knowledge updated.
So an IPO is simply a company's first sale of stock/shares to the public. Its said that an IPO occurs when a company registers its stock with the Securities and Exchange Commission and can sell equity ownership in the company to the public. In simple words, I'm giving you (meaning the public) a part of the ownership of my business. I do it for the first time and hence it is an IPO (initial public offering). These stocks or shares are often refered as securities. These securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. It is done to raise a capital for the business from the market. The shares offered in an IPO are usually a new issue, but they may also be shares held by major shareholders, or a mixture of both. These are then free to be sold or purchased after the allotment at the prevalent market prices.
The process of the IPO can vary and involves sort of a complex application process for shares. The price at which the shares are sold will either be pre-determined, or determined by an auction process. If the price is predetermined, it depends on the total net asset value of the company. There are two components in the price of a share: face value and a premium/discount.
Example: Suppose we want to float an IPO for CE. For convenience, lets take our net asset value as 100crore. Now our requirement for a capital is, say, 1 crore. So I can float an IPO for 1 lac shares at a face value of Rs. 100 each. Now, if CE is a growing company and has very bright prospects, the demand for CE shares will be very high. Hence we can charge a premium for this demand. This extra money generated by the premium goes into the development of the company. Similarly, if the company is not doing well, the share price can drop below the threshold, when it is called "at-discount" If the share is sold at the face value itself, it is called as "at-par" (Talk about popularity.. 1 Share of Infosys can sell as high as upto Rs. 22000. What a premium)
An IPO also usually needs a mechanism for deciding how to distribute shares when there are too many applications (the offer is “over-subscribed”). This may be partly solved by an auction, but even auctions can have too many applications at a particular price point (i.e. higher prices will not buy the whole issue, at this price it is over-subscribed)
So this is all about IPO that I could tell you.
I have 1 question. "Why would public decide to invest their money in the IPO of any company?"
A term well heard but seldom understood by most of the people. I came across a post in one of the threads many days back asking for some one to explain what is initial public offering. Well, before I begin, let me tell you that I'm a marketing guy and have no basic qualification in Finance as such. But I keep a keen watch on these things and keep my knowledge updated.
So an IPO is simply a company's first sale of stock/shares to the public. Its said that an IPO occurs when a company registers its stock with the Securities and Exchange Commission and can sell equity ownership in the company to the public. In simple words, I'm giving you (meaning the public) a part of the ownership of my business. I do it for the first time and hence it is an IPO (initial public offering). These stocks or shares are often refered as securities. These securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. It is done to raise a capital for the business from the market. The shares offered in an IPO are usually a new issue, but they may also be shares held by major shareholders, or a mixture of both. These are then free to be sold or purchased after the allotment at the prevalent market prices.
The process of the IPO can vary and involves sort of a complex application process for shares. The price at which the shares are sold will either be pre-determined, or determined by an auction process. If the price is predetermined, it depends on the total net asset value of the company. There are two components in the price of a share: face value and a premium/discount.
Example: Suppose we want to float an IPO for CE. For convenience, lets take our net asset value as 100crore. Now our requirement for a capital is, say, 1 crore. So I can float an IPO for 1 lac shares at a face value of Rs. 100 each. Now, if CE is a growing company and has very bright prospects, the demand for CE shares will be very high. Hence we can charge a premium for this demand. This extra money generated by the premium goes into the development of the company. Similarly, if the company is not doing well, the share price can drop below the threshold, when it is called "at-discount" If the share is sold at the face value itself, it is called as "at-par" (Talk about popularity.. 1 Share of Infosys can sell as high as upto Rs. 22000. What a premium)
An IPO also usually needs a mechanism for deciding how to distribute shares when there are too many applications (the offer is “over-subscribed”). This may be partly solved by an auction, but even auctions can have too many applications at a particular price point (i.e. higher prices will not buy the whole issue, at this price it is over-subscribed)
So this is all about IPO that I could tell you.
I have 1 question. "Why would public decide to invest their money in the IPO of any company?"
