What is IPO? Read before investing in IPO.

An initial public offering

An IPO (initial public offering) is referred to a flotation, which an issuer or a company proposes to the public in the form of ordinary stock or shares. It is defined as the first sale of stock by a private company to the public. They are generally offered by new and medium sized firms that are looking for funds to grow and expand their business.

Basics of private and public:
Companies fall into two broad categories:

Private
public

A privately held company has fewer shareholder sand its owners don't have to disclose much information about the company. Most small businesses are privately held, with no exceptions that large companies can be private too, like Domino's Pizza and Hallmark Cards being privately held.Shares of private companies can be reached through the owners only and that also at their discretion. On the other hand, public companies have sold at least a portion of their business to the public and thereby trade on a stock exchange. This is why doing an IPO is referred to going public.

Why go public?

The main reason of going public is to raise good amount of cash through the various financial avenues that are offered. Besides, the other factors include:

Public companies usually get better rates when they issue debt due to increased scrutiny.
As long as there is market demand, a public company can always issue more stock.
Trading in the open markets means liquidity.
Being Public makes it possible to implement things like employee stock ownership plans,which help to attract top talent of the industry.

Factors to be considered before applying for an IPO:

There are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India:

1. Historical record of the firm providing the Initial Public Offerings
2. Promoters, their reliability and past records
3.Products offered by the firm and their potential going forward
4. Whether the firm has entered into a collaboration with technological firm
5. Project value and various techniques of sponsoring the plan
6. Productivity estimates of the project
7. Risk aspects engaged in the execution of the plan

General Terms involved in IPO:

Primary market: It is the market in which investors have the first opportunity to buy a newly issued security as in an IPO.

Prospectus: A formal legal document describing the details of the company is created for a proposed IPO, also making the investors aware of the risks of an investment. It is also known as the offer document.

Book building: It is the process by which an attempt is made to determine the price at which the securities are to be offered based on the demand from investors.

Over Subscription: A situation in which the demand for shares offered in an IPO exceeds the number of shares issued.

Green shoe option: It is referred to as an over-allotment option. It is a provision contained in an underwriting agreement whereby the underwriter gets the right to sell investors more shares than originally planned by the issuer in case the demand for a security issue proves higher than expected.

Price band: Price band refers to the band within which the investors can bid. The spread between the floor and the cap of the price band is not be more than 20% i.e. the cap should not be more than 120% of the floor price. This is decided by the company and its merchant bankers. There is no cap or regulatory approval needed for determining the price of an IPO.

Listing: Shares offered in IPOs are required to be listed on stock exchanges for the purpose of trading. Listing means that the shares have been listed on the stock exchange and are available for trading in the secondary market.

Flipping: Flipping is reselling a hot IPO stock in the first few days to earn quick profit. The reason behind this is that companies want long-term investors who hold their stock, not traders.

Process involved in IPO:

UNDERWRITING:
IPO is done through the process called underwriting. Underwriting is the process of raising money through debt or equity.

The first step towards doing an IPO is to appoint an investment banker. Although, theoretically a company can sell its shares on its own, but on realistic terms, investment bank is the prime requisite. The underwriters are the middlemen between the company and the public. There is a deal negotiated between the two.

E.g. of underwriters: Goldman Sachs, Credit Suisse and Morgan Stanley to mention a few.

The different factors that are considered with the investment bankers include:

The amount of money the company will raise
The type of securities to be issued
Other negotiating details in the underwriting agreement
The deal could be a firm commitment where the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public, or best efforts agreement, where the underwriter sells securities for the company but doesn't guarantee the amount raised. Also to off shoulder the risk in the offering, there is a syndicate of underwriters that is formed led by one and the others in the syndicate sell a part of the issue.

FILING WITH THE SEBI:
Once the deal is agreed upon, the investment bank puts together a registration statement to be filed with the SEBI. This document contains information about the offering as well as company information such as financial statements, management background, any legal problems, where the money is to be used etc. The SEBI then requires a cooling off period, in which they investigate and make sure all material information has been disclosed. Once the SEBI approves the offering, a date (the effective date) is set when the stock will be offered to the public.

RED HERRING:
During the cooling off period the underwriter puts together the red herring. This is an initial prospectus that contains all the information about the company except for the offer price and the effective date. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. With the red herring, efforts are made where the big institutional investors are targeted (also called the dog and pony show).

As the effective date approaches, the underwriter and the company decide on the price of the issue. This depends on the company, the success of the various promotional activities and most importantly the current market conditions. The crux is to get the maximum in the interest of both parties.

Finally, the securities are sold on the stock market and the money is collected from investors.

How does IPO work in India:
The IPO process starts when the company lodges a registration declaration in accordance with SEBI. The entire listing declaration is then studied by the SEBI. This is followed by the prelude brochure proposed by the sponsor and then an authorized catalog prior to the share offering. The value and time of the IPO are then determined.

Applying for an IPO in India:
When a firm proposes a public issue or IPO, it offers forms for submission to be filled by the shareholders. Public shares can be bought for a limited period only. The submission form should be duly filled up and submitted by cash, cheque or DD prior to the closing date, in accordance with the guidelines mentioned in the form.

What is a Systematic Investment Plan? How does it work?

What is a Systematic Investment Plan?

A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

How does it work?

A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme.You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Rupee-Cost Averaging

With volatile markets, most investors remain skeptical about the best time to invest and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.

Power of Compounding

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.

Example
If you started investing Rs. 10000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.

However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 60th birthday - more than double the amount you would have received if you had started ten years later!

Other Benefits of Systematic Investment Plans

· Disciplined Saving - Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.

· Flexibility - While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.

· Long-Term Gains - Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

· Convenience - SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.

What Is a Derivative and How Do Derivatives Work?

As the world melted down during the 2007-2009 collapse, investors were asking all kinds of questions about derivatives such as, "What is a derivative?" and "How do derivatives work?". At the time, I sat down to pen an article walking you through the basics but now, many years later, I want to return, expand, update, and clarify some of the original points I made so you have a better understanding of the role of derivatives in the overall economy, financial markets, and, perhaps, even in your personal investment portfolio.

Let's start at the beginning by answering the most fundamental question: What is a derivatives

What Is a Derivative?

The term derivative is often defined as something -- a security, a contract  that derives its value from its relationship with another asset or stream of cash flows. There are many types of derivatives and they can be good or bad, used for productive things or as speculative tools. Derivatives can help stabilize the economy or bring the economic system to its knees in a catastrophic implosion due to an inability to identify the real risks, properly protect against them, and anticipate so-called "daisy-chain" events where interconnected corporations, institutions, and organizations find themselves instantaneously bankrupted as a result of a poorly written or structured derivative position with another firm that failed; a domino effect.

A major reason this danger is built into derivatives is because of something called counter-party risk.Most derivatives are based upon the person or institution on the other side of the trade being able to live up to the deal that was struck. If society allows people to use borrowed money to enter into all sorts of complex derivative arrangements, we could find ourselves in a scenario where everybody carries these derivative positions on their books at large values only to find that, when it's all unraveled, there's very little money there because a single failure or two along the way wipes everybody out with it.

The problem becomes exacerbated because many privately written derivative contracts have built-in collateral calls that require a counter party to put up more cash or collateral at the very time they are likely to need all the money they can get, accelerating the risk of bankruptcy. It is for this reason that billionaire Charlie Munger, long a critic of derivatives, calls most derivative contracts "good until reached for" as the moment you actually need to grab the money, it could very well evaporate on you no matter what you're carrying it at on your balance sheet. Munger and his business partner Warren Buffett famously get around this by only allowing their holding company, Berkshire Hathaway, to write derivative contracts in which they hold the money and under no condition can they be forced to post more collateral along the way.

7 Steps To Stock Investing Without Too Much Risk.

Millennials are more likely than other generations to be risk-averse.

They hold 52% of their savings in cash and only 28% in stocks, according to a UBS study. For other generations, the weightings are nearly the reverse: 23% in cash and 46% in stocks.

A 2013 Accenture report found that 43% of Millennials identify as conservative investors, whereas just 27% of Gen Xers and 31% of Boomers do.

And 43% said they would never be comfortable investing in the stock market, in a MFS Investment Management study.

But investing conservatively — or investing very little and holding your money in cash — runs counter to conventional investment advice for the young, which says, invest aggressively now, while your long time horizon will allow you to recover from any losses, so you can reap the compounding benefits of growth.

If you’re a gun-shy Millennial investor or a risk-averse investor of any age, here’s how to try out stock investing without getting burned.

1. Learn about the various types of investments.

If you’re absolutely brand-new to investing, get the lay of the land first. Read some basic books (here’s a good list), join an Investing 101-type Meetup group, and do some research, such as on the Bogleheads forum, for do-it-yourself investors.

“Know: what is a stock, what is a bond, what is an investment allocation, what’s a mutual fund, what’s an ETF,” says PJ Wallin, a certified financial planner with Richmond-based Atlas Financial. “Kind of like Warren Buffett said with derivatives, ‘If it’s too hard to understand, maybe I shouldn’t invest in it.’”

2. Invest in a broadly diversified portfolio of low-cost ETFs (exchange traded funds) and index funds.

Keeping your costs low is surefire way to reap higher returns. Over time, tiny percentage charges and or small fees add up — for a median-income two-earner family, they will eat away almost one-third of their investment returns in a 401(k), according to a study published by the public policy organization Demos, The Retirement Savings Drain: Hidden and Excessive Costs of 401(k)s.

Going with index funds and ETFs not only keeps your costs low, but it also limits your risk. “With an index approach, where you’re investing in mutual funds or ETFs that allow you to get access to over 8,000 individual positions, you’re not at risk of one company going bankrupt or falling out of favor with the market,” says Wallin.

3. Don’t try to beat the market; participate in it.

In trying to beat the market, investors usually underperform not just the market, but even the investments they choose, because they buy and sell at less than optimal times.

To participate in the market’s gains over time, Wallin suggests creating a portfolio diversified across different asset classes — large cap, mid cap, small cap, U.S., international developed, international emerging, etc. — and then depending on how far you are from retirement, or how much risk you want to take, determining the balance of stocks versus bonds. Regularly invest a portion of your paycheck or other money so that you’re not timing your trades but just making investing a habit. Learn these 10 secrets to outperforming other investors. And don’t make these five big investing mistakes.

4. If you want to try investing in stocks, set aside a small percentage of your portfolio — and be willing to lose it all.

Once you’ve got a nice nest egg started, you should have a financial planner or investment advisor who is a fiduciary, meaning they’ll give you financial advice that’s in your best financial interest, ahead of their own. (See the slide show below for what questions to ask when choosing a financial advisor.) With your planner, determine a percentage that you can safely set aside for stock investing. No matter what, it should be an amount of money that you don’t need to achieve your goals.

“If you want to try out a little stock investing, take a small portion of your money and do it with abandon and have fun and good luck to you, but for the rest of your money, keep it in a diversified portfolio,” says Kitces, who recommends people set aside no more than 5% or 10%. “We see very affluent folks that do it with 2% because that’s a lot of money if you have a big account,” he says. Treat this money as if it were gambling money — accept that you very well may lose it.

5. To mitigate the risk even further, look into Motif Investing.

“What a true experienced stock investor will tell you is that it’s important to have risk structures for yourself so you don’t have one idea that blows up your entire portfolio,” says Kitces. One way of doing that, even when you veer from the typical diversified portfolio and dive into stocks, is to spread the risk again, which you can do through Motif Investing, which founder Hardeep Walia calls “a concept-driven investing platform” that allows you to follow through on your own investing desires.

Let’s say you think the Internet in China will grow hugely in the next several years, and you want to invest in companies that will benefit. While it might take a while to investigate all the various Chinese portals, e-commerce companies and social networks, and then choose a few to invest in, you could instead buy a China Internet “motif,” or a selection of up to 30 companies that stand to grow along with China’s internet. (Motif offers 150 motifs it has curated, plus almost 65,000 motifs that users, many of whom are professional investors, have created.) Each motif is $9.95 per trade, which, since most trades consist of buying shares in 30 stocks, is much cheaper than what you’ll find on similar platforms.

While many planners would be extremely cautious about recommending their clients invest in stocks, Kitces says that Motif is an improvement: “To take the classic example from 10 years ago, if you were investing in an energy motif instead of an individual energy company, you don’t have the risk that the individual company you picked turns out to be Enron. So you can still benefit from the boom in energy, and not worry that the company you picked might turn out to be a problem company even in the middle of what was otherwise a good idea.”

6. When trying Motif, decide what type(s) of investing you’d like to do.

Walia emphasizes that the platform suits a range of investing strategies and personalities: If you’re an active trader and you want to trade the most beaten-down stocks every week, such as in its Buy the Dip motif, you can choose a motif that will do that for you. Motif can even accommodate the low-cost diversified part of your portfolio that is the core of your strategy with its Horizon models, which are automatically rebalanced every quarter and completely free (no management fee, no $9.95 charge).

“We have people on our platform who are day traders that trade 30 times a day, and we have what we call ‘set it and forget it’ investors — ‘Give me the one motif I need to buy and let me go to sleep. I really don’t have time for this.’ We can cover all these ranges,” says Walia. With your play money — go with an in-between strategy where you won’t trade every day, but you can take a more active role and veer from the traditional passive investing philosophy.

7. To select motifs to buy with your ‘play’ money, go with industries or subjects you understand, or convictions you have.

Unlike regular investing where certain principles guide your actions, with motif investing, it’s really about what you know or think. “Invest in the ideas that are compelling to you and for which you think there’s a reasonable basis,” says Kitces. Don’t choose motifs based on past performance: “If your view is that 3D printing is going to go crazy and be the biggest idea over the next 10 years, frankly, I couldn’t care less what it’s done over the past year.”

If, say, you believe interest rates will rise and some companies will benefit, you could buy the Rising Interest Rates motif. “We always encourage people to start with something they understand, if you’re a newbie investor. My dad’s a surgeon, so he might take something like Minimally Invasive Surgery,” says Walia. “It doesn’t mean it’s the right investment, but it’s a nice way to get comfortable investing if you’re a new investor. You can say, ‘This is overpriced right now, I understand the companies in this motif.’”

Unlike with a mutual fund or ETF, you will see all the securities you will own, and the weighting behind each. If you want, you can change the weighting within the basket, or if you think certain companies in the sector are missing, you can add them (up to the 30-stock limit). Socially conscious investors will be happy to know they can also remove stocks from their motif.

Select several motifs to fill out the non-traditionally allocated portion of your portfolio to further spread the risk. Walia owns 20 such motifs. Depending on how much money your 5% or 10% is, you will may want to spread your risk out with as few as five motifs or as many as Walia has.

Finally, don’t try to time your trades to buy low and sell high. Buy a motif because you believe in it — not because the price seems low. “Everything has been going up for five years straight, so frankly something that has been down in the past year when the market has been up tremendously, to me would certainly would raise questions. Why do you want to buy something that can’t even make money in a bull market? Clearly other investors don’t think it’s a good deal at the price it’s at. You could believe they’re wrong and have a good reason, but it better be a darn good reason rather than ‘it’s cheaper than it was a year ago.’”

What is IPO Grey Market?

IPO Grey Market is an unofficial market where IPO applications or shares are bought and sold before they become officially available for trading on the stock exchange.

Its an over-the-counter market where dealers may execute orders for preferred customers as well as provide support for a new issue before it is actually issued.

Note: As IPO Grey Market is unofficial over-the-counter market, there are no regulations around it. All transactions are done in cash on personal basis. SEBI, Stock Exchange or Brokers are not involve or back these transaction.

Grey market trading include :

Trading (selling or buying) IPO Applications at certain rate (premium) and
Trading (selling or buying) allocated IPO shares before they list on stock exchanges.
Grey market trading is usually done among the small set of people who trust each other as there is no official platform or rules define for these trading.

Two popular terms used in IPO grey market are ‘Grey Market Premium' and ‘ Kostak'.

1. Grey market premium (or grey market price) is a premium amount in rupees at which IPO shares are being traded in Grey Market before they get listed in stock exchange. Grey market premium can be in positive or in negative based on demand and supply of the stock.

Grey Market Premiums are also attached with words ‘Buyer' or ‘Seller'. They tell the price either at which buyers are willing to buy shares or the price at which sellers are willing to sell their IPO shares.

Example:
Mundra Port and SEZ Limited
Issue Price: Rs 440 per equity share
Grey Market Premium: Rs 400 (Buyers)

This means buyers are ready to buy Mundra Port shares at 440+400 = Rs 840.

SVPCL Limited
Issue Price: Rs 45 per equity share
Grey Market Premium: Rs -6 (Seller)

This means sellers are ready to sell SVPCL shares at the discount of Rs 6. i.e. 45-6 = Rs 39.

2. Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually ‘Kostak' value is defined as the premium of a maximum lot retail application in an IPO.

Kostak price is important mostly before issue is close for subscription and final bidding status is available to the IPO investors. Very few IPOs applications are traded after final bidding status is available to the investors.

‘Kostak' is especially for people who do not want to take risk with IPO allotment or listing gains.

Example:
BGR Energy Limited
Issue Price: Rs 480 Per Equity Share (at upper band)
Lot Size: 14
Grey Market Premium: Rs 350 to Rs 360
Kostak (Rs 100000): Rs 2500 to Rs 2600

This means BGR applications of Rs 1 lakhs are being traded in IPO Grey Market at Rs 2500 to Rs 2600.

Even though the Grey Market Premium of this IPO is around 75% of the issue price, the ‘Kostak' is just 5% of the application amount. This is because Grey Market traders are assuming that the issue will highly oversubscribe and there will not be firm allotment even for retail investors who will apply full Rs 1 lakhs. They are assuming one out of two people will get allotment and thus Rs 2 lakh investment will give them approximate Rs 5000 return. This way they are ready to buy 1 lakh application for Rs 2500.