Introduction:
IPOs are highly anticipated in the investment world because they mark the first time a company offers its shares to the public. Two reasons any company decides to go public are to expand its capital and raise funds to fuel future expansion. Whether it is debt reduction, mergers, acquisitions, expansions, or raising more capital, IPOs are helpful. However, IPOs follow a complex process peppered with jargon all the investors must know. Since this is a crucial occurrence in the world of shares and securities, learning the meanings of the most used IPO terms is necessary for all investors.
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Read on to learn more.
Prospectus
All companies provide a marketing brochure or prospectus during an IPO. The prospectus includes all vital information potential investors will need before purchasing a company's shares: financial data, description of the offering, information about the board of directors, nature of business, or any information deemed necessary for investors is included in the prospectus.
Issue Price
Depending on the financial health of a company, market conditions, and potential demand from investors, the price at which a company offers its shares during an IPO is fixed. This is known as the issue price.
Price Band
This is the range within which investors can bid for shares offered in an IPO. Depending on the bids received, a company's issue price is fixed.
Book Building
The process through which a company establishes its price band within which investors can bid for shares during an IPO is known as book building. This is also needed to fix an issue price.
Underwriter
Underwriters are usually financial institutions or banks specialising in valuation who manage the IPO. From determining the issue price to promoting shares and ensuring the IPO is a success, underwriters play different roles. At times, to back the IPO, underwriters also agreed to purchase any unsold shares.
Subscription
The process through which investors apply for shares during an IPO is a subscription. A high volume of demand or oversubscription shows the public's enthusiasm for a company's share, while the opposite is demonstrated through under subscription.
Allotment
After a company receives applications during an IPO, they are analysed, and shares are assigned to investors. This is known as allotment. Investors might not always get the volume of shares they apply for, and this decision is at the company's discretion.
Listing
The process through which a company's shares are enrolled on the stock market is known as listing. Only after the shares are listed can the public buy and sell them.
Cut-Off Price
The price at which a company's shares are allotted to retail investors is known as the cut-off price in an IPO. It is determined through the process of book-building.
Grey Market
The unofficial market on which shares are traded before being listed on the stock market is known as the grey market. Though trading on this market is unregulated and purely speculative, it can be used to gauge the potential demand for a company's shares.
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Price Discovery
The process through which a company arrives at the appropriate price for shares to be issued during an IPO is price discovery. When done properly, it ensures shares are evaluated fairly and only after considering the company's financial health, market conditions, and investor demand.
IPO Grading
Credit rating agencies independently grade the IPO after considering and assessing a company's fundamentals along with the associated risks of the IPO. This grade is often used by potential investors while deciding to invest in an IPO.
Greenshoe Option
Greenshoe option or over-allotment option offers underwriters an option to sell more shares than was initially planned for an IPO. This offers flexibility and helps stabilise a stock's price, especially when met with a greater demand.
Red Herring Prospectus
This is a model prospectus that's created before an IPO that includes essential information a normal prospectus would include, excluding the issue price and shares offered. It gives a general idea of the prevalent demand in the market for a company's shares.
Conclusion
Investors must be aware of and understand the key terms and steps related to an IPO to make the most of it. Making informed decisions also becomes easier once investors can fluently speak the IPO lingo. However, it's important to consider risk tolerance, fund availability, and investment goals before investing in the IPO market.
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