Understanding the IPO jargon: A guide to key terms and definitions
The IPO process can be complex and time-consuming, and there are a number of jargon terms that investors need to be familiar with.
Here is a guide to some of the key terms and definitions of IPO.
Issue price: the cost at which shares of the firm will be offered to investors prior to the time when the company will start to trade on stock markets. It is also known as the asking or offering price.
Lot size: It is the bare minimum of shares on which an investor may make a bid in an IPO. Bidding for additional shares must be done in multiples of the lot size. One must bid for at least this many shares, for instance, if the lot size for an IPO is 1,500 shares. If the bidder wishes to submit a higher offer, it will be in increments of 1,500, like 3,000 and 4,500.
Price band: A price band is a way of determining value when a seller sets an upper and lower cost restriction that prospective buyers can make their bids inside. The purchasers are guided by the price band's range.
Book building: Book building refers to the procedure used by an underwriter or merchant banker to try to identify the price at which the IPO will be launched. The underwriter prepares a book in which he submits the offers made by institutional investors and fund managers for the number of shares and the asking price. The underwriter determines the IPO price once a plan is created and a price range is chosen.
Under subscription: Undersubscribed is a situation in which the demand for an IPO is less than the number of shares issued.
Oversubscription: Oversubscribed is a situation in which there is a larger demand for a new issue of securities than there are available securities. Underwriters or other financial institutions selling the asset may raise the price or provide extra securities when a new issue is oversubscribed to reflect the greater-than-expected demand.
Green shoe option
It refers to an overallotment option. This underwriting agreement enables the underwriter to sell more shares than the firm had originally intended. When demand for a share is larger than anticipated, it occurs.
In essence, it enables the issuer business to release more shares on the secondary market in the case of oversubscription.
What is grey market in IPO?
The grey market is an unofficial market where individuals buy and sell IPO shares before they are officially launched for trading on the stock exchange. There are no restrictions around an unregulated over-the-counter market since it is one. Cash is used exclusively for all personal transactions.
Brokers, stock exchanges, or other third-party businesses are not engaged in this transaction. 'Grey Market Premium' and 'Kostak' are two buzzwords frequently used in the IPO grey market.
What is grey market premium?
Grey market premium (GMP) is the premium price at which shares of grey market initial public offerings (IPOs) are traded prior to their listing on the stock exchange. Simply put, shares in the firm that launched an initial public offering (IPO) is purchased and sold outside of the stock market.
The GPM depicts potential outcomes for the IPO on the day of listing. For instance, we may anticipate that the IPO would list at about Rs 120 per share on the listing day if the business offers an IPO for Rs 100 per share and the grey market premium is about Rs 20.
Although there is no dependability, the GMP generally functions as intended, and the IPO lists around the specified price.
What are Kostak rates?
The price paid for an IPO application before the shares are posted on the stock exchange is known as the Kostak rate in the IPO grey market. One method of selling shares on the grey market is to sell the buyer the whole IPO application.
For instance, an investor applied for shares in the IPO of XYZ firm for Rs 2 lakh. He or she is uncertain about the allocation of shares and the potential listing benefits. There is a different buyer on the other side who is willing to assume the risk. "Sell me your Rs 2 lakh IPO application at Rs 5,000," they would demand.
If the seller agrees, they might get Rs 5,000 and finish the transaction. The Kostak costs Rs 5,000. Almost always, the bidder requests that the seller sell the shares on the day of listing and pay the difference. Keep in mind that the application seller is still responsible for paying taxes. If the gap is sufficiently large, this can consume all of the earnings.
Let's say you are a retailer. You must pay the buyer Rs 25,000 (Rs 30,000 - Rs 5,000) if your profit on the day of listing was Rs 30,000. On Rs 30,000, you are required to pay taxes, which, at a 20 per cent rate, might be Rs. 6,000. This might lead to a transactional net loss of Rs 1,000.
Conclusion
Investors can decide whether or not to participate in an initial public offering, but it is one approach to increase the earning potential of their investment. IPOs are frequently seen as significant stock market occurrences for a cause.
Investors have a chance to make significant returns over the long term by making the appropriate investment in the right company.
The challenge, though, is to identify the top achievers from the others.