IPO means initial public Offer and as its name says it is the process of offering shares of any company by the promoters of any private corporation to the general public for the very first time. Before making an investment in IPO, you must have a fair idea about the terms related to IPO. It is not like the company wants the public to be its shareholders but the company has its own requirements and to meet those, the company issues IPO for public issue.
An Initial Public Offer (IPO) is just a way for a company to raise investments from retail and small investors to meet its projects’ operational expenses and get a broad market reach by associating with the Stock Exchange. But when you will go through the process of an Initial Public Offering (IPO) for investment purposes, you will come across some common but repetitive terms used along with IPO words. So, before making an investment in IPO, you must have a fair idea about those terms related to IPO and the same will be discussed in this article.
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Common Terms related to IPO
There are some common but important terms related to IPO that every investor must know before bidding in an IPO, and they are:
‘Market Lot Size’ and ‘Minimum Order Quantity’ for an IPO
As an Investor, you must know these two terms related to IPO before bidding/investing in an IPO and those are ‘Market Lot’ and ‘Minimum Order Quantity’. Minimum Order Quantity, as the name says, is the minimum number of shares an investor can apply while bidding in an IPO. If an investor wants to bid for more shares, they can apply in multiples of IPO market lot (lot Size or IPO bid lot) of shares. Usually (Market Lot * Lower side of the issue price) values around Rs 14500/- to Rs 15000/-
Example:
IPO: MapMyIndia IPO
Public Issue Price: Rs. 1030/- to Rs. 1050/- Per Equity Share
Market Lot: 14 Shares
Minimum Order Quantity: 14 Shares i.e One lot and investors can invest according to lot size and not per single share.
Price Band of an IPO
IPO is usually offered in a lot size and you cannot invest in a single share through it, but have to purchase an entire lot if offered and got successful. Lot is having a bunch of shares and the number of shares is variable. One price band of that lot is decided by lead managers with the help of the company by looking at the demand for their share in the market.
Demand is ascertained by the company during the roadshow phase of IPO, and accordingly, the company will assess the best price at which maximum investors’ are willing to buy its share. Depending on that, the company will fix the price band of the lot and the number of shares in the lot.
Date of Issue
It is the date when the company opens or offers its IPO for subscription to the investors. The date of issue is announced by the lead managers of the company after consultation with the registrar of the issue and the stock exchange. All these things were initiated by the company post getting the IPO clearance from the Security Exchange Board of India (SEBI) and approval from the Stock Exchange. Accordingly, the Date of issue and time frame for which the IPO will remain open for subscription is decided and notified.
Registrar/Lead Manager of an IPO
Lead manager is among the important terms related to IPO which you will come across very often. The registrar of an IPO is the prime body in the IPO process and it undertakes various main services like processing the IPO application to SEBI and Exchange for approval, Issuance of the share and transferring the share to Demat accounts of the successful investors, refunds to unsuccessful investors, etc. The registrar is not an individual person but a financial institution registered with SEBI and Exchange and is appointed by the company that wants to go public.
Follow on public offering (FPO)
It is also the process of raising funds from public investors as IPO but FPO is issued by the company which already listed on the exchange. That means the FPO process took place after the IPO and here in FPO, investors have a fair idea about the company because it is already listed. Hence FPO is less risky than IPO, but also has fewer returns than IPO. It is a public issue of shares for already listed companies. An FPO is a stock issue of additional shares made by a company that is already publicly listed and has already gone through the IPO process.
Listing Gain
Many times there is a big difference between the price at which companies decide on their shares and the price at which investors are willing to buy shares and that gives a good listing gain for shares allocated to the investor in IPO. Every IPO does not offer a good listing gain for the investor and opens at a discounted price in the market where investors lose their base amount.
Maximum investors look toward these IPO for this listing gain only, as a good company enters the market with a positive response. Here, investors can earn a sizeable profit if the company debut in the market with a good listing gain. Listing gain is among the most used terms related to IPO.
Basis of Allocation or Basis of Allotment
It is a document published by the registrar of an IPO to stock exchanges and IPO investors. This document contains information about the final price fixed for an IPO, issue subscription (bidding) information or demand of an IPO, and shares allocation ratio. The IPO allotment information is categorized by the number of shares applied by an applicant.
The ratio of the allotment is important to know for investors in case of an oversubscribed IPO. This will tell how many applicants will receive a single lot of shares among a certain number of applicants. For example, ratio 1:8 means only one out of eight applicants received one lot of shares; ratio value ‘FIRM’ means all the applicants are eligible to receive a certain amount of shares.
Dividend Process
A dividend is a process of paying out some profit of the company back to its eligible shareholder. It is generally made by publicly listed companies and it can be taken as a reward to its shareholders by the company. It is just a way to share the profit and it is not obligatory for the company to share it the company can retain the profit and can use it for future expansion.
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