Initial Public Offering

What is an IPO?

In financial terms, IPO or initial public offering is the first issuance of a company's shares to the general public. It is called as primary market. These shares are allowed to be transacted in the stock market where they can be bought and sold. It is called secondary market. In other words, An IPO is defined as an exercise when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. One thing to note is the shares allocated to the public do not constitute 100% of the company's shares. Only a certain percentage is allocated to the public. Usually the company owner or the board of directors will still hold the majority of the shares.

What is the need of IPO?

Organization offer IPO is to raise capital for their organization. The main reason is because companies plan to use the money gathered from IPO to further expand their business or to increase their business operations. Legal compliance and financial regulations that needs to be followed during IPO process.

Procedure for issue of IPO

Step :1(Assigning Underwriter)

Company needs to set up underwriters. Underwriters are nothing but investment banks. The purpose of underwriters is to assess the business. Underwriters are used to analyze operational and financial background of the company in order to determine the value of the company's shares to be sold to the public. The company will sign an agreement with the lead underwriter to sell shares on the market and the underwriters can proceed to sell these shares to any interested investors. For large corporations dealing with billions of dollars of shares, several large investment banks may act as underwriters. These banks are paid commissions for shares that they sell. The underwriters will also help the company deal with the legal and financial regulations imposed by the country.

Step :2 (Performing Legal procedures)

While launching IPO, they reserve some percentage shares for various categories such as Retail investors, Institutional Investors and Employees. As soon as the IPO is successfully launched, companies will need to submit their annual business earnings reports to the financial securities board since the company's shares will be listed in the stock market. It changes based on the country. In India, it is SEBI.

Step : 3(Grading)

IPO-grading is nothing but Grade which assigned by a Credit Rating Agency registered with Financial securities. Shortly, it is called as CRISIL . The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. These grading is generally assigned on a five-point benchmark

grade 1 : Poor fundamentals

grade 2 : Below-average fundamentals

grade 3 : Average fundamentals

grade 4 : Above-average fundamentals

grade 5 : Strong fundamentals

Types Of Mutual Funds

Types Of Mutual Funds

By Structure

• Open Ended

These are schemes that do not have a fixed maturity. The mutual fund ensures liquidity by announcing sale and repurchase price for the unit of an open-ended fund.

• Closed Ended

These are schemes that have a fixed maturity. The money of the investor is locked in for the period. Occasionally, closed-end schemes provide a re-purchase option to the investors, either for a specified period or after a specified period. Liquidity in these schemes is provided through listing in a stock market; however this option is not yet available in India.

• Interval Schemes

These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.

By Investment Objective

• Growth Schemes

Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short term decline in value for possible future appreciation.

These schemes are not for investors seeking regular income or needing their money back in the short term.

• Income Schemes

Income Schemes Aim to provide regular and steady income to investors. These schemes generally invest in

fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

• Balanced Schemes

Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents.  In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls.

• Money Market / Liquid Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short term instruments such as treasury bills, certificates of deposit, commercial paper and inter bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.

Other Schemes

• Tax Saving Schemes (Equity Linked Saving Scheme - ELSS)

These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds.Eligible for deduction under section 80C .Lock in period three years

• Index fund

Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.

Bond immunization

• Bond immunization is an investment strategy used to minimize the interest rate risk of bond investments by adjusting the portfolio duration to match the investor's investment time horizon. It does this by locking in a fixed rate of return during the amount of time an investor plans to keep the investment without cashing it in.
• Immunization locks in a fixed rate of return during the amount of time an investor plans to keep the bond without cashing it in.
• Normally, interest rates affect bond prices inversely. When interest rates go up, bond prices go down. But when a bond portfolio is immunized, the investor receives a specific rate of return over a given time period regardless of what happens to interest rates during that time. In other words, the bond is "immune" to fluctuating interest rates.
• To immunize a bond portfolio, you need to know the duration of the bonds in the portfolio and adjust the portfolio so that the portfolio's duration equals the investment time horizon. For example, suppose you need to have $50,000 in five years for your child's education. You might decide to invest in bonds. You can immunize your bond portfolio by selecting bonds that will equal exactly $50,000 in five years regardless of interest rate changes. You can buy one zero-coupon bond that will mature in five years to equal $50,000, or several coupon bonds each with a five year duration, or several bonds that "average" a five-year duration.
• Duration measures a bond's market risk and price volatility in response to a given change in interest rates. Duration is a weighted average of the bond's cash flows over its life. The weights are the present value of each interest payment as a percentage of the bond's full price. The longer the duration of a bond, the greater its price volatility. Duration is used to determine how a bond will react to changing interest rates. For example, if interest rates rise 1%, a bond with a two-year duration will fall about 2% in value.


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Efficient Market Hypothesis (EMH)

Efficient Market Hypothesis (EMH)

An efficient market is one in which securities prices reflect all available information. This means that every security traded in the market is correctly valued given the available information.

There are a number of different definitions of what constitutes an efficient market depending on the what information is deemed to be available.

Weak form efficient markets

• The weakest form of efficient markets is that securities prices reflect all information contained in historical prices. This is the easiest to prove, by showing that share prices follow a random walk.
• It is this form of efficient markets that technical analysis rejects, and neither the track record of technical analysis as a strategy or the evidence from studies of historical prices, provide reasons to reject it.
• Some investors have successfully used statistical arbitrage techniques. However only a minority of the actual trades make large profits, so the deviations from market efficient are, on average, small and they are expensive to find.

Semi-strong form efficient markets

• The semi-strong form of efficient markets is that securities prices incorporate all publicly available information. Given how difficult it is to find groups of “smart” investors who consistently outperform the market, this seems likely. There do seem to be some investors with very impressive records. The semi-strong efficient markets hypothesis is probably very close to being true, but not always true.
• There is evidence that smart investors do out-perform. This probably reflects access to better information rather than better analysis of information that is available to all.

Strong form efficient markets

• The strongest form of efficient markets is that prices incorporate all information that any investor can acquire. This seems unlikely given that insider traders can undoubtedly make money fairly consistently.
• Not only do insider traders make money, but in most situations where insider trading takes place prior to the public release of price sensitive information the price move significantly on the public release of the information. Therefore the non-public information was not fully reflected in the price.