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IPO Methods of Pricing

Once the registration gets approved by the regulator and the completion of meetings with potential investors the company and investment bank together decide on issue date, issue price and the minimum lot quantity that an investor should subscribe to. The maximum quantity (amount) that an investor can subscribe to depends on the category (eg; retail investor, Mutual Fund etc) that the investor falls into. This limit and categorization are provided by the regulator. However the exact price is decided by one of the following methods. Fixed Price Method Book Building method Fixed Price Method: In this method of pricing the investment bank in consultation with the firm fixes the price at which an investor can subscribe to. This price could be at par value or at a premium above the par value. Book Building Method: In this method of pricing a price band is fixed instead of a fixed price. The lowest price in the price band is called as floor price and the highest price is called as cap price. An investor can subscribe at a price anywhere in the price band. An investor who wants to subscribe at any price can mention the cut-off price. This cut-off price is decided once the bid period is over. Once the issue is closed a book with descending order of prices is prepared. Cut-off price is the price at which the entire issue gets subscribed. This is the most commonly used method.

Process Of Initial Public Offering ( IPO Process)


In this paper we will describe briefly the process of Initial Public Offering or IPO Process. The IPO process will be explained step by step and we also show the role of the underwriter behind the initial public offering. Mainly the small private companies issue IPO to grow and trade publicly. The process of initial public offering consists of several steps. Those are discussed below.

When a company is aiming to go public, at first it hires an investment bank to do the underwriting, the way of raising money through equity or debt, functions associated with the issue. Although, a company itself also may sell its shares but, usually an investment bank is selected for that purpose.

Underwriters act as intercessors between the public, who are investing, and the companies.

The investment bank and the company will first initiate the process of deal negotiation. The main discussing issues are the money amount that the company is going to raise, security type to be issued and all the other details involved with the underwriting agreement. Once the deal gets finalized, the investment bank sets a registration statement up which will be submitted to the Securities and Exchange Commission. That registration statement consists of information regarding the offering and also other company informations like, background of the management, financial statements, legal issues etc. Then the Securities and Exchange Commission (SEC) needs a cooling off period during which it will examine all the submitted documents and make sure that all information regarding the deal have been given to them. After getting the SEC's approval, a date is going to be fixed on which the company will offer the stock to the public. During the above mentioned cooling off period the underwriter publishes an initial prospectus that contains all the necessary information regarding the company. The effective date of issuing the stock as well as the price have not been mentioned in the prospectus, for these are not known at this time. Then the company and the underwriter meets to decide the price of the stock. This decision depends highly on the current market condition. Lastly, the stocks are sold in the market and money is raised from the investors.

IPO Analysis
Abstract: IPO analysis observed several trends in the IPO market in the last couple of years. Not all companies listed on the exchange succeeded though. The article below highlights the trends in the IPO market in the last few years. Experts reviewing the markets have kept a close watch on the IPOs or the initial public offer. IPO analysis has indicated that there are many

companies, awaiting their listing on the stock exchange. On the other had, there were few companies who had their timelines extended and also lessen their price points. In general, if the IPO market is "frothy", a "temporary" or "intermediate market top" is implied. Another expert view suggests that the promoters as well as the merchant bankers were sailing in the same boat. It is felt that investors need to weigh the pros and cons prior to taking the plunge. The investors ought to avoid listing prices of the "grey market", which may be anomalous due to manipulation. IPO analysis showing IPO trends: Studies reveal that the year 2004 was a year when several IPOs were seen. In fact, statistical data proved that in the same year (2004) as many as 242 initial public offerings were launched. This figure in fact far outnumbered the IPOs of the previous years, 2001 to 2003 taken together. The returns from the stock offerings were also handsome and proved to be advantageous for the investors who dared to invest in the turbid waters. Statistics imply that majority of the companies, which were listed on the stock exchange in the year 2004 had a yearly sales record below $50 million. However, things were not the same for all the companies. There were certain companies, which did not make enough profit. It was found in the year 2004, that about 4 out of the 10 companies, which became listed on the stock exchange, approximately, 39% of them did not earn profits. This situation was however better than the days of 1999-2000, when the 74% of new publicly listed companies lost. Another trend, which has been observed from IPO analysis indicates that there are certain drug making companies(pharmaceutical companies), which have a tendency to get listed on the stock exchange even before they start earning profits. The reason may be attributed to the fact that these companies usually take longer period for manufacturing medical equipments and medicines. This is in sharp contrast to majority of the companies, which usually manifest profitability for a period of 6 months (at least) prior to trading on the stock exchange.

Pre IPO
Pre IPO Investment involves significant amount of risk. The securities purchased through Pre IPO Investment may prove to be illegal and the investor may lose his total investment value. Pre IPO refers to a situation, when the process of Initial Public Offering(IPO) has not

been started by the respective company. It is possible for persons to be involved in Pre IPO Investing even before the company opens up its IPO deal. There are several companies, which persuade the investors to make Pre IPO Investment by promising them high returns. In most of the cases, these companies are new business venture firms who are just starting their business and claim to have e-commerce facility. But, this Pre IPO Investment is associated with significant levels of risk. It has been observed that many start up businesses publicize Pre IPO Investment by sending "spam" e-mails. All these investment offers circulated through e-mails are actually illegal. The Main Disadvantages or Risks Associated with Pre IPO Investing are the following: If a person makes Pre IPO Investment, then it leads to holding unregistered securities. In this case, the investor will not be able to sell his security holdings until the respective company goes public. Moreover, if a person buys restricted securities from an issuer or affiliate of issuer through unregistered and private sale, then the investor will be unable to liquidate those securities before one year, even if the respective company starts its Initial Public Offering Process in the mean time. An investor may find , that the securities, purchased through Pre IPO Investing are illegal. This is because, every company requires to register the transactions in order to legalize its Initial Public Offering and if any company escapes this registration process, then its IPO deal becomes illegal. There is a possibility that the company, whose securities are purchased through Pre IPO Investing, fails to go public. If this happens, then the investors are never able to recover their investment value. So, in order to avoid these risks, investors need to gather detailed information about the company, the stock promoter and the underwriter firm, before making any Pre IPO Investment.

IPO Allocation
IPO allocation is the method of allocating securities to the potential bidders in the primary market. Generally there are 3 channels through which this allocation is made and they are Fixed-Price issue, Book Building and Dutch auction. This article gives all the necessary details on IPO allocation. IPO Allocation Initial Public Offering or IPO allocation is the process by which an issuing company allocates securities to the investors. There are many ways through which this allocation is done. Some of them are given in the following:- Method of

Fixed-Price issue According to this process, IPOs are offered by the issuing company (on agreement with its appointed investment banker) to the investors at a predetermined fixed price. Investors could apply for the same at that specific price only. In this process, the allocation price is known to the investors in advance. Process of Book Building According to this process, the IPO issuing company first specifies the price range along with the maximum number of securities that would be issued. Now, the investors are allowed to bid for the securities at different prices. These orders are recorded in an electronic book and the bidding continues for a specified time period. Bid prices below the floor price of the price band are not accepted. The issuing price of the IPO is discovered only after the book building closes. The final price is then determined by the issuing company in discussion with its appointed investment banker (known as book-runner). Price evaluation process includes earliness of the bid, quality standard of the applicant investors, aggression of price, and many more. After taking these factors into consideration, IPO allocation is finally done based on the final price. Dutch Auction Method IPO is also allocated to the investors through a process known as Dutch auction procedure. According to this, IPO issuing company first asks for a high price for each security offered. Then it lowers this price for matching the bid price. The price that is announced last is taken by the winning bidder. Investors place their bid prices through the security brokers and large banks via electronic media and consequently know the outcome in a very short period of time.

Hot IPO
Abstract: Hot IPO involves trading of shares which are greatly in demand. In case of Hot IPO stocks, demand exceeds supply and therefore the companies opening IPO deals gather substantial gains in the first few days of trading. Hot IPO refers to an Initial Public Offering, which has excessive demand in the market. In case of this type of Initial Public Offering, investors are so much interested in buying these securities that the demand exceeds the supply by far. Due to this great demand, prices of the shares start to increase tremendously, as soon as the IPO deal is opened in the market. In general, the shares offered through Hot IPOs are said to be oversubscribed shares. This means that the shares are in great

demand and supply is falling short of the demand. It should be mentioned here that, as the shares of Hot IPOs generally involve high demand, the underwriter companies offer these stocks to their most valued customers. If we look into the history of Hot IPOs, we will find, that the world experienced hottest IPOs in the late years of 1990s. In this period, demand for Internet Stocks reached record high level and almost all the Internet Stocks was found to be oversubscribed. Due to this excessive demand, these Hot IPOs experienced substantial gains in the first few days of trading. The extent of high IPO demand of this period can be understood from an example. In this phase, price of shares of an IPO went upto $68 from $16. Among these late years of 1990s, the most memorable year was 1999. This year can be termed as the year of the exploding IPOs. In fact the trend of Hot IPOs, started in the year 1998, when companies like eBay and theglobe.com opened their IPO deal. It can be mentioned here that eBay is listed in NASDAQ as EBAY and theglobe.com is listed as TGLO.

IPO Grading
Abstract: IPO grading was made compulsory by the regulator of the marketSEBI or Securities And Exchange Board of India. IPO grading is helpful for individual buyers in particular. Not only does it help in knowing the offer quality but it also conveys the fundamentals of a company. As of 2006, the market regulator, SEBI or Securities And Exchange Board of India in its circular declared that the IPO grading of different companies could be carried out by CRISIL or Credit Rating Information Services, Fitch Ratings, ICRA or CARE or Credit Analysis And Research. Earlier IPO grading was optional however, as of 2007, has made it obligatory for IPO grading. The IPO of the companies are graded to ascertain the strength of the fundamentals of the different companies as far as the performance is concerned. The grading is done prior to the shares of the companies being listed on the stock exchanges of the country. Grading scale: IPO grading usually comprises grades from 1 to 5 where companies are rated in this range. Experts are of the opinion that IPO grading will make way only for the well performing firms to list their shares. This would be beneficial especially for investors, whose incidence of losing money in the capital markets may be minimized. This holds true particularly at a time when markets are volatile and there is an increasing liquidity crunch.

In addition to the above, the investors will also know about the quality of offer and will stand a better chance of investing money in the investment vehicle of that company, which will give more ROI or return on investment. The first companies to have the IPO grading of their offer done by CRISIL include: Shree Ashtavinayak Cine Vision Minar International In both the cases, the rate assigned to the IPOs of both the companies were 2 out of 5. IPO grading is beneficial particularly for the retail buyers. However, there are many parameters, which are not taken into account when IPO grading is carried out. Hence, IPO grading alone should not be a deciding factor for an individual to decide upon his investment preferences.

IPO Underwriter
Abstract: In this paper we will define IPO underwriter and describe the role of it. A company may either sell its stock by itself or go to an IPO underwriter. Mainly the investment banks play the role of underwriter. An IPO candidate should have a clear understanding about the terms and commitments given by the underwriter. Those who look after the pricing, positioning and marketing of a company's initial public offering is termed as underwriter in Economics. Mainly the investment banks are used to play the role of underwriter. The roll of an IPO underwriter is very important behind the success of that company's public issue. An individual who will go for an IPO ought to understand the several contracts, terms and commitments given by the underwriters. The way of issuing the insurance policies is called underwriting, that is, the process through which the investment bankers collect capital for investment from public on behalf of the governments and the company. An IPO underwriter can be thought of a middle man who plays between the public who go for IPO and the company. The new issues are mainly introduced in the market by the IPO underwriters, although the company itself can do this. Therefore, the public have to take the risk while going for an IPO.

The underwriting agreements usually are divided into two parts: one is firm commitment and the other is best efforts. Under the former agreement, the underwriters promise to purchase all the IPO stocks and then sell them to the public. While, "best effort" signifies that the underwriters will put their best effort up to sell the stocks. Usually, from their respective issuing clients the underwriters get the underwriting fees but, sometimes, they can make profit as well by selling the underwritten shares to the public. However, the IPO underwriters take the burden of circulating the securities issue to the investors.

Online IPO Penny Stock


Abstract: Online IPO Penny Stock is the online process through which an investor could apply and avail the IPO shares of penny stocks. These IPOs are very attractive to the small retail investors because of their cheap price tag. This article tries to shed light on penny stock and the procedures involved in applying for them. Introduction Online IPO Penny Stock is very popular among the retail investors. These investors are always in a look for these very cheap stocks which fit their budget very easily. Big investors generally avoid these IPOs because of their high risk propensity. Online IPO Penny Stock helps the investors to apply for the same from anywhere they want provided they have online access. Penny Stock Characteristic Features Stocks which trade in the market at a very cheap price are known as penny stocks. In USA, these stocks generally move within the price range of one to five US Dollars. Market capitalization of such stocks generally doesn't cross the five hundred million dollar mark. These stocks are not traded through the standardized exchanges. Penny stocks are Over-the-Counter stocks. Advantages These stocks are available at a very cheap price in the market (both primary as well as secondary). Fluctuation in the price is enormous which can increase the portfolio value of the investors by many times within a very short time span. Disadvantages Information regarding its fundamental is not made available to the investors

by the concerned company. Such information is available only through the stock brokers. Penny stocks are not preferred by many since they are not liquid, so the frequency of buy and sell of the same is very less. Chances of manipulation in these shares are very high and movement of price takes place on the basis of rumors. Online IPO Penny Stock Investors could apply for the penny stocks through online route and consequently avail the same. Now-a-days, investors don't have to go to the broker premises and fill up the form. These IPO Penny Stock application forms are available to the investors online. They can fill up the same and submit their preferences (of price as well as quantity) through that channel. Conclusion Online IPO Penny Stock has helped the small investors to apply and ultimately invest in these IPO shares in a more convenient way. They don't have to visit premises of broking houses and fill up the form. Hence, online route has made the process of IPO penny stock application easier.