The number of initial public offerings (IPOs) hitting the market has increased recently as the secondary market is at an all-time high. During bull markets, the perception of stock markets being a place of easy money becomes strong and IPOs are witnessing significant over-subscription. For instance, the BSE IPO got over-subscribed 51 times while the Dmart Avenue IPO was over-subscribed by over 100 times. The over-subscription is a clear signal that appetite for IPO is increasing in the market.
Pricing of IPOs
If a seller wants to sell, he will ensure that he will get the best price. In the same way, promoter will ensure that he gets highest possible rate for the shares he wants to sell. To list the company, promoters will hire an investment bank to handle the IPO.
Investment banks (underwriters) put up the money to fund the IPO and buy the shares of the company before they are actually listed on a stock exchange. They make the profit on the difference in price between what they paid for and share that are listed on the exchange. Generally, it is the banks (underwriters) and the company which decides on the price depending upon the current market condition, anticipation of the IPO, competitive company trading at what price, etc.
If an IPO trades at a significant premium, it gives a confidence boost to those companies waiting to tap the
market. During a rising market, people are afraid to invest in stocks which are usually trading at high valuation so they shift their focus to IPO.
Before subscribing to an IPO, investors should look for answers to some questions like, what does the company do? Is there demand for its product and services? Is demand expected to grow or sustain? What are the profits made by this company in past three years and projected profit for next couple of years. What is the book value of the company? Finally, while subscribing to an IPO, Remember the golden words of investment guru Peter Lynch: Know what you own, and know why you own it.
The writer is director & COO, Tradebulls Securities