Stocks

In this episode, we cover the most fundamental questions about IPOs. What is an IPO in the first place, and the whole process a company needs to go through before coming out with an IPO. Finally, we also understand why do companies issue an IPO.

What is an IPO and why companies go public?

This episode explains all the key terms related to an IPO. We cover everything which you must know for understanding an IPO - from Price band, Lot size, and Listing date to RHP and Grey market price, you will learn everything in this episode.

Key terms related to an IPO

Here, we understand the four main categories of investors who participate in an IPO namely, Qualified Institutional Investors, Anchor Investors, Non-institutional investors and Retail Individual Investors.

Types of buyers in an IPO

Do you often get confused if you should apply for an IPO or not? Well, not anymore! In this episode, we will help you understand the Red Herring Prospectus (RHP) of a company coming out with an IPO. We will start with basics about RHP and then cover the main segments which you must focus on.

What to look for in an RHP before investing in an IPO?

Now that we have learnt everything about an IPO, we address the most important question - How to apply for an IPO? Furthermore, we will also give you insights on how to increase your chances of getting an IPO allotment.

How to invest in an IPO?

This module covers everything you need to know about IPOs including the various terms associated with an IPO, types of buyers, how to read the RHP document of a company and how to invest in an IPO

All about IPOs

Introduction:<ul><li style="font-weight: 400;">Now that we have covered what an IPO is and why do companies go for an IPO, let&rsquo;s talk about the different terms that you may face when you look to invest in an IPO. We assure you that after this you will be much more comfortable when you look at the next IPO.&nbsp; </li></ul>Key IPO Terms:<ul><li style="font-weight: 400;">We will explain all the terms with the help of an example. Let&rsquo;s take the example of Burger King IPO.&nbsp;</li></ul><table style="border-color: black; width: 256px;" border="black"><tbody><tr><td colspan="2">Burger King IPO Details</td></tr><tr><td>IPO Opening Date</td><td>Dec 2, 2020</td></tr><tr><td>IPO Closing Date</td><td>Dec 4, 2020</td></tr><tr><td>IPO Price</td><td>₹59 to ₹60 per equity share</td></tr><tr><td>Market Lot</td><td>250 Shares</td></tr><tr><td>Listing Date</td><td>Dec 14, 2020</td></tr><tr><td>Listing Price</td><td>₹135 per share</td></tr><tr><td>Issue Size</td><td>810 crores</td></tr><tr><td>Fresh Issue</td><td>450 crores</td></tr><tr><td>Offer for Sale</td><td>360 crores</td></tr></tbody></table>&nbsp;<ul><li style="font-weight: 400;">IPO opening &amp; closing date: IPO opening date is the date on which you can start applying for the IPO. The IPO closing date is the last date on which you can apply for an IPO. In the Burger King IPO. The Burger King IPO opened on December 2nd,2020 and closed on December 4th, 2020.&nbsp; </li><li style="font-weight: 400;">Listing Date: This is the date on which the company gets listed on the stock exchange. On this date, the Shares of the company are traded on the stock exchange. Burger King got listed on the stock exchange on 14th December 2020. &nbsp;</li><li style="font-weight: 400;">Price Band of an IPO:A price band is the Lower and upper price limit of an IPO. In our example, 59 to 60 Rs per shareis the price band of the IPO. Here, 59 Rs is the minimum price at which investors can bid for the shares. This price is called the floor price. Similarly, the maximum price at which investors can place a bid is called the cap priceof the IPO. In the case of Burger King IPO, the cap price is 60 Rs per share.&nbsp; Next, there is something called a cut-off price. The cut-off price is the price at which Shares get issued to the investors.It is the offer price finalized by the company along with the investment banks, and it could be any price in the price band. We covered the cut-off price in detail in the previous video. The cut-off price for Burger King was 60 Rs per share </li><li style="font-weight: 400;">Lot Size: When you apply for an IPO, you can&rsquo;t bid for any number of shares that you want. You have to buy lots. In the case of Burger King, one lot is 250 shares. Hence, you can bid for 1 lot, 2 lots or 3 lots meaning you can bid for 250, 500 or 750 shares. Generally, a lot size is designed so that you have to invest around 15,000 Rs for one lot.&nbsp; </li><li style="font-weight: 400;">Listing Price: As you know by now, the listing date is the date on which the stock gets listed on the stock exchange. After getting listed on the stock exchange, the Price at which the stock openson the stock market is called the listing price. In the case of Burger King, the stock got listed at 135 Rs per share. Now you can see that the IPO price band was 59-60 Rs per share, but the stock got listed 135 Rs per share.Hence, someone could have sold his shares at 135 Rs per share as soon as the market opened on 14th December 2020, and he would have made a return of 125%on a listing day. This return is called listing gains.&nbsp; </li><li style="font-weight: 400;">Issue Size:Issue size is the Total value of all the shares being offeredin the IPO. In the case of Burger King, the issue size is 810 crores.This means that shares worth 810 crores are offered in the IPO .&nbsp;</li><li style="font-weight: 400;">Fresh Issue and Offer for Sale:When a company goes for an IPO, it offers fresh shares in order to raise capital. They may use this capital to fund new projects, expand their businesses or reduce debt. This part of the IPO is called afresh issue. An offer for sale is when the existing shareholders sell their existing shares. Hence, no new shares are issued in the process and the money doesn&rsquo;t go to the company but to existing shareholders. It&rsquo;s a way for existing shareholders of the company to exit and earn some return on their investment. Out of Burger King&rsquo;s IPO issue size of 810 crores, 450 croreswas raised via fresh issue shares and 360 crores via offer for sale. </li><li style="font-weight: 400;">Red Herring Prospectus (RHP): A Red Herring Prospectus is a document that informs investors about the company.&nbsp; The document is very useful to investors because it provides detailed information about the company&rsquo;sbusiness operations, financials, promoters and the company&rsquo;s objective for raising funds. It also informs investors about the potential risksof investing in the IPO. In its RHP document, Burger King said that they intended to raise capital to open new restaurants. It shared its financials, details about its past performance and the future outlook of the business. Burger King also shared details about the outstanding criminal and legal cases against both the company and its directors. </li><li style="font-weight: 400;">Grey Market Price:If you have tracked any IPO, you often come across the term grey market price. But what is a grey market? A grey market is a market where shares of a company are bought and sold outside the official trading channels. Since it is unofficial, there are no regulations around it. All transactions here are done in cash, and unlike transactions on the exchange, there is no stock exchange or brokerto back a particular transaction. In the grey market, shares are traded before they get listed on the stock exchange. The price at which shares are traded on the grey market gives investors an idea as to what will be the listing price of the IPO. However, this isn&rsquo;t always accurate.&nbsp;</li></ul>Conclusion:<ul><li style="font-weight: 400;">When you invest in an IPO as a retail investor, are you the only one applying for the IPO? Certainly not. In the next video, we will discuss the different types of investors who participate in an IPO</li></ul>

Key terms related to an IPO

Transcript