Okay but laana:
What are all these IPOs about?
8th May 2021
Reading time ~ 3 minutes
Hi there,
There's been a lot of talk about IPOs in the past year. You might have heard of Nykaa, Coinbase, Zomato, etc. gearing up for their IPOs in the news, and we thought it might be good to cover the basics of what IPOs really are, what they mean for you, and as usual, break down the unrequired jargon.
Okay cool, so what are IPOs? Initial Public Offers
Mhmm, no but really what are Initial Public Offers?
Let's take the example of Zomato. When Zomato started in 2008, the founder (and perhaps, a few of their friends and family) put in the money to kick-start their operations, pay salaries, pay for marketing, any office expenses, etc. Since it was all their money, they owned the entire company (i.e owned all of the equity in the company). Eventually, it became interesting enough that angel investors/ venture capitalists* wanted to give them some money in return for some of the equity (we think some cred also goes to their hilarious + relatable content). The motivation for this is usually that the company needs money to grow and expand their operations, and the investors will earn back their money and a hefty return in the coming years once the worth of the company increases. Zomato was valued at $5.4 B earlier this year, owned something like this:
This usually goes on for a number of years, after which there comes a point that the company is big enough that the general public (i.e: us) will be willing to invest small amounts of money for some sort of return in the future. This general process of when the company is offering its shares to the general public to invest in, for the first time, is called an IPO.
Now, the process of an IPO is not as simple as it sounds - the company has to go through a lot of documentation, like A LOT. This is submitted to a regulatory authority - i.e SEBI (Securities and Exchange Board of India). These documents are also released to the public, so that investors can look at company history, financials, growth, etc. They will also mention how much they are looking for investors to invest (also called "issue size"), the number of shares that are available for individual investors, as well as the price range that they are targeting per share. So, for example, Zomato is planning on raising INR 8250 Crores through this IPO. The price range for Zomato is yet to be announced. They say they are planning to use the money for organic and inorganic growth initiatives, and general corporate purposes (basically, putting the money for marketing, expansions, etc.).
Based on this, you - an individual investor - can make a call whether you'd like to invest in the company or not. Similarly, larger investors who run mutual funds or hedge funds, etc. will also take a similar call.
Got it, and how do I go about this?
With an IPO, you have the chance to get your hands on shares before they hit the stock exchange. For that, you have to apply for the offer. If more people apply than they have slots available, it turns into a lottery and you might or might not win the shares. There are also other options if you have more monies to spend and get a better chance at that lottery - you can look that up here.
Now, let's say you win the lottery - you are now "allotted" the shares and the amount associated with the number of shares you get will be deducted from your account. Once this is complete, the shares will be listed on the stock exchange (such as BSE, NSE) on the "listing date." You are now free to buy more or sell your shares depending on the price that is ongoing on the stock exchange, or just keep them for the long term :)
People invest in IPOs of companies they believe in since once the stock gets listed on the exchange, the odds of the share value soaring are high, which might go even higher once the company establishes itself and its earnings (so with an IPO they could be getting a reasonable price). Of course, take this with a pinch of salt, as nothing is for sure or 100% in the stock market. Investors have found multiple post IPO opportunities where they identified undervalued shares.
IPOs are usually complicated, so before investing, make sure that you have done thorough research on the industry, financial reports, and believe in the future growth of the company. Investing directly in stocks is inherently very risky for a novice investor, so please do your homework. If you don't want to, you can defer to the opinion of mutual funds - who will take a call whether to invest in the company or not (pre or post IPO) based on the objective of the scheme (for example, you won't see large-cap funds investing in new companies - simply because these are new companies and are not big enough to enter the "large-caps." Make sense?
*angel investor/ venture capitalists are high-net worth individuals that invest their money (usually, huge sums) in startups that they believe have high growth potential
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