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Initial public offering!!
There couldn't be a better way to start the foundation of the most famous finance
topic the stock market.
This blog consists of two parts; part 1 is an introductory part that contains
history of IPO, basics of IPO, secondary market, primary market, stock
exchanges and brokers.
If you are not new to these terms and if you are familiar with the fundamentals
then, I suggest you skip directly to part 2.
Note – All terminologies used in part 2 are explained in part 1.
Part 2 consists of spicy realities of IPO, explaining the process of minimal or
0% risk strategy for developing outstanding returns from the IPO, Internal
working of IPO in a non-CA and ordinary retail people's perspective, historical
data and its analysis, and finally the steps one can follow with precautionary
measures to earn from IPOs.
PART 1
Initial public offering IPO is not a topic under the stock market, rather the
the stock market itself is a byproduct of IPO.
(If you are completely new, I understand your frustration because this sentence
makes no sense isn’t it? To understand this first sentence you have to
completely finish this blog)
There are many companies in India across States across different fields and if a
the company needs funds, which could be for a variety of reasons and if they are
also not interested in raising money from the banks or other financial
institutions, then there is a way for those companies to raise money from the
public, in return offering the shares of a company.
This method of the companies raising money from the public in return for offering
the shares of the company, for the first time, is termed as an initial public
offering IPO.
There are a set of criteria that the company should pass before applying for IPO
and all these things are taken care of by SEBI (securities and exchange board
of India), those criteria are a long and quite complex process. Anyways we are
not interested in it.
20-25 years back everything was offline and it took so many days for this IPO
the process to complete, and it was hectic for investors.
But now it's completely online and everything is very fast, even applying for an
IPO.
To apply for an IPO one must have a Demat account from any of the
stockbrokers in India.
What is a Demat Account?
Demat means de-materialized, years before when everything was offline the
shares were given in the form of share certificates, people were holding physical
share certificate in their home but as everything turned online, those physical
certificates are maintained in electronic format in the national securities
depositaries, there are two depositories in India NSDL and CDSL who
maintains all the Demat accounts and the shares, and bonds in it.
If NSDL and CDSL can do all these jobs, what is the need for brokers?
NSDL and CDSL cannot handle such a big population, hence they need a
mediators and they are stock brokers, stock brokers are also called has
depositary participant. We, people, open Demat account in depositary via
depositary participant, any problem we face are sorted out by stock brokers
and not depositaries.
Demat account is quite similar to the bank account, we keep money in the
bank and the bank takes care of it, similarly here in Demat account we keep
the shares of the companies and brokers take care of it.
One can easily apply for the IPO from the brokers’ terminal or app, one can also
apply from their bank account if they have internet banking facilities, which usually
the process of IPO takes around 10 days.
You apply from your broker and you get the UPI mandate request, after
accepting it, a certain amount will be blocked in your bank account and on the
allotment day, if you are allotted with shares then those shares get transferred
to your Demat account or your money will be refunded.
Ok, let's now take some illustrations to clarify things more clearly, let's say
some random company has started the IPO and many people have applied to it
and few people got allotted the shares, those allotted shares are in their
respective Demat accounts and everything is fine but, what if the individual
who got allotted with shares, has to sell his shares after some days or years to
get back his money, now, to whom can he sell??
How can he sell??
Damn, where can he sell??
That's where the concept of the share market begins, "market for shares".
There are people who applied for IPO but didn't get an allotment, so such people
are keen and ready to buy shares from others who had got allotted and this
marketplace called a stock exchange helps both sellers as well as buyers to
get their work done.
There are two stock exchanges in India, the Bombay stock exchange(BSE) and
the National stock exchange(NSE), BSE is one of the oldest stock exchanges in
Asia and the National stock exchange started in the year 1994, both are located
in Mumbai but never mind their location because everything today is online
and you can buy and sell shares in your home, If you have seen a scam 1992
then you would know how to order matching used to happen before this online
facilities, Physically brokers use to go to exchanges to execute our orders.
But there is a twist here in the stock market, we can't trade directly with the
exchange and even after introducing online facilities, we still take the help of
the stockbrokers, we place our orders on brokers platform and they match
orders in the exchange and then the order executes. We are so lucky people we
end up paying charges to both brokers as well as exchanges even today.
Other key points
• The Market where the process of transfer of shares from the company to
the people in exchange of funds, for the first time, is called the primary
market.
• A company can also resell the shares of the company for the second and
subsequent times to the public to raise funds, and then the process is
called Follow on public offer (FPO).
• People applying for IPO cannot apply for a random number of shares
they wish instead, they have to buy in lots and the price of each lot
comes around 15,000rs.
• A company after IPO will be called a public limited company signifying
the general public are their shareholders, until then it would be private
limited or LLP.
• After the end of the IPO process, the day when the shares of the company
can be traded in the exchange is announced during the start of IPO and
it is called listing day. It is from that day onwards that the shares of a
the company would be traded actively in the stock market and anyone
interested can buy or sell those shares on their broker's platform.
• The stock market is called a secondary market.
PART 2
Will everyone apply for every IPO that is been issued.
Definitely not!!
There are a lot of concepts that one should go through to apply for the best
IPO.
1. Fundamental approach
2. Listing day gains approach
The fundamental approach (which we are not concentrating on now) is a
tedious approach and requires pure skill in corporate analysis, finance, and other
rules and regulations of Government, SEBI and etc, it also requires us to be
very smart in estimating the ability of the company's growth for the future, all
these things can only be taken care of by experts and everyone can't do this.
So BOS solutions have got a solution!!
Listing day gains approach - this is the approach basically we follow, it's the
an easiest approach that anyone can follow and this is the main topic of this blog,
before going through it, I have a question for you.
As per the list of contents in part 2, shall I start with the possibilities of
doubling your money or shall I start with the internal working of this particular
approach??
I bet you choose the first option so let me explain the possibilities of doubling
your money in IPO
Let's say a company named ABC issues IPO with the price of its single share
being fixed at 15,000 rupees and you apply for it, for this example let's assume
one share is equal to one lot and you had applied for 1 lot, on the allotment day
it's your luck you got the allotment of the share and now the share is in your
Demat account.
On a listing day, the price of the share lists in the stock market at 30,000
rupees,
It’s a damaka! your money has been doubled, your share which you had got
allotted for 15,000, now on the first day of trading in the stock market, it starts
trading from 30,000rs and you sell off your share and you take back your
doubled money.
Yes, it's as easy as you just imagine but everything comes with a package.
What if the price of a share on a listing day starts trading at 7,500 instead of
30,000?? Once again it's a damaka, you lost 50% of the money within a matter
of weeks.
Then how to get the first option and skip the second option??
How to get the right ones and miss out on the bad ones??
For that, you need to understand and implement the listing day gains
approach.
Let's go through the internal working of the listing day gains approach in
simple words.
Let's say a company is offering 100 shares in the IPO and also assume that one
share is equal to one lot and there are already a total of 1000 applications for
the shares, so in this scenario, it is obvious that the demand for the particular
share is very high and this is a condition where we get in. but why?? Go
ahead!!
Issue - 100 shares
Demand - 1000. Shares
There are big players like HNI (HIGH NET WORTH INDIVIDUALS) with a huge
amount of money and also they usually don't take risks, they have all kind of
well equipped, well knowledged and intelligent people around them because
they have huge money and they invest in huge quantities, not only rich people
but also banks, insurance companies and other financial institutions also
apply for IPO.
There are subscription data that is available from the first day of the IPO,
across all categories which can be seen as demand data, it gives the accurate
a number of applications for the IPO from several categories.
The categories include the general public or retail category, HNI, QIB
(QUALIFIED INSTITUTIONAL BUYERS) they are basically financial institutions
like insurance companies, foreign investors & etc.
Now the demand data from subscription details are available, just focus on HNI
and QIB categories till the last date of the application, these people rule the
market, if they feel it's a good IPO then it must be good, if the numbers are
good, then that's a thumbs up for us.
Sometimes it's possible that the IPO is subscribed 500 times, which means that
there are 100 shares to be given, but there is a demand for 50,000 shares
and allotment as you know is a lottery, getting allotment in this scenario is still
a dream for many investors because it's very tough, if you get these tough
allotments please inform me, I would like to take your blessings
We learnt about Subscription data but it is not the only thing that we are
looking into.
Another criterion is a grey market premium, I know by this time you will be
scolding me because I explained about the primary market, secondary market
and now directly mentioning a new term called grey market, so kindly don't
worry and just read on.
The Grey market is an unofficial market, basically where the pre-IPO contracts are
bought and sold, they are all taken care of by local dealers. (don’t worry if you
didn’t get it)
From the opening of the IPO process till the listing day, there could be a lot of
non-patient rich and smart people, who just can't wait till the end and also doesn't
want to miss out on the IPO shares (those are people who think that this
particular IPO is blockbuster and wants those shares at any cost) so what they
do is they simply buy other’s IPO applications at a premium fee, it's sort of
contract where if a guy who sold his application gets allotment then he has to
transfer the share to the guy to whom he sold the application earlier, the seller
here gets the previous premium he received while selling his application.
Let's say I apply for IPO, I don’t know how the IPO is going to be, so for me this
particular IPO is a risky bet as I am uncertain about it, but there are some
experts who are very certain, in this situation if one of those offers me to buy my
IPO application at a premium fee of an additional 5%, I would close my eye and
take this deal because I was afraid of the outcome of the IPO additional to that
I am getting a 5% fee for my application, I got rid of the risk and also gained 5%.
From the buyer’s perspective, as he is an expert and also very certain, he thinks this
IPO will gain 50% profit, so to ensure his profits also his allotment he is buying
other’s application for a 5% premium, so accordingly if things go his way he
will end up with 45% profit, it’s a win-win situation for both of them.
The seller gets the 5% premium only if he gets an allotment if his application gets
no allotment then he has to return the money.
And it goes like an auction, who gives more premium gets the IPO application
and by then the probability of getting the IPO shares increases by buying more
and more applications.
Here dealers play a prominent role and they take care of all these buyers and
sellers and it is completely unofficial, the premium here fluctuates from the buyer
to the buyer and this is a premium upon which the listing day price of a share is
also guessed and this particular premium is called the grey market premium.
Extraordinary grey market premium indicates that the IPO is great and also
infers that very big people are interested in it, we should keep an eye on this
the premium for continuous days till the last day of the application.
So now there are two parameters, subscription data and the grey market
premium, both of these parameters are more than enough to apply for IPO,
especially for listing day profits
High subscription and high grey market premium are basically created by the people who know more about the business, who have more money and who know more in-depth fundamental aspects and have the expertise, so we cannot go head on head against these people by doing our own analysis unless we don't have any other job, rather we play smart and just follow their footprints and that's it...
Now let's see the historical data and its analysis
Historical analysis is basically to show how our strategy has worked, so all those explained above is a facts and not an opinion. Steps you can consider following - look for small IPOs because big IPOs are many times risky, small big is in the sense of the amount they are raising. which amount is small or which amount is big it's hard to comment on it in general but, just keep this point in mind when you get an option to go for a small IPO. - have a look at the subscription data till the last day of the application, IPO subscription data should be a minimum of 50x on the last day of the IPO application - have a look at the grey market premium till the last day, Grey market premium also indicates the most probable listing price of a share. Since it can basically fluctuate a lot so don't go for it if it is less than 50%. (the price of share fixed by the company is 100/share, but in the grey market some applications are sold at 150/share and that's called a 50% premium) Finally congratulations for being till now, I appreciate your patience and hence we have a surprise for you. I have been saying that data is available on the web, data is available somewhere etc, but where exactly, I know it's a hectic process to go search on the Internet to get all these data to analyze and stuff, it’s not easy for people with so many work. So to simplify it for you we are opening our official Instagram page for BOS solutions. You don’t have to worry or stress about all the things explained above in this blog, we do all the work and give you the regular, adequate and right information at the right time cheers. The link for our page and channel is given below
If you don’t have a demat account, you can open your account using any of the below links.
Open a trading account in 5paisa
https://5paisa.page.link/L1CqiQeBcMenvtndA or use the referral code NARA750
Use this link and open a trading account in Zerodha and join us, India's number 1 stockbroker https://zerodha.com/?c=HI3727
THANK YOU!!
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