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Essential IPO Glossary: Key Terms Everyone Must Know

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Published Date: 05 Aug 2024Updated Date: 30 Dec 20246 mins readBy MOFSL

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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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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