9 key IPO terms you should be aware of
An initial public offer (IPO) is an invitation by the company which is offering to sell its shares for the first time in the stock exchange. These shares will be subscribed by people who are looking to invest long term in a company or are looking for a good company to diversify their respective portfolios in order to minimize risks.
Here are some key terms that one must be aware of, before subscribing for an IPO of a company.
#1. Primary Market
One often hears about the term primary market whenever there is an IPO on the cards but this term is unclear to a lot of people who are looking to put in their funds in the IPO. Primary market is the market where the company offers its shares for the first time to the retail and other investors to come and subscribe them. When the company’s shares get listed on a stock exchange, the shares can be transferred from one person to another. This takes place in a secondary market.
#2. Authorized, Issued and Subscribed Capital
Now, let’s understand the capital structure of a company. Authorized capital is the capital that the company is allowed to issue. A company cannot issue shares beyond what is mentioned in its memorandum. Issued capital is the capital which the company actually issues to the public to subscribe to its shares in the primary market. Subscribed capital is the capital which is subscribed by the public in the primary market.
Whenever the company receives excess share demand in a particular IPO, it issues shares on a pro-rata basis which means that a person who has applied for 5 shares might get only 3 shares to his name. Hence the ratio is 5:3 in this case. The company can also reject the excess applications on a particular IPO.
#4. Merchant Banker
Every company which goes for an IPO appoints big investment banks or merchant bankers who conduct their IPOs successfully on the stock exchange. The job of a merchant banker is to make the IPO, a success and makes sure that the company shares are being subscribed for in a full amount.
#5. Green shoe Option
It is a part of the underwriting agreement which, in the event that the offering is oversubscribed, allows the issuer to authorize additional shares (typically 15%) to be distributed by the syndicate. It is also called the overallotment option.
#6. Price Band
A Company which goes for an IPO gives a price band to its probable investors which comprises of a fair price of a share with an upper limit and a lower limit. An investor can bid for the share price including the highest and the lowest price which is mention in the band width of the IPO and the price which receives the maximum bids becomes the issue price of the share.
It is an invitation brochure to the public which tells about the profile, the operating business of the company and the industry that the company operates in. A prospectus contains all the information about the company including its history, management and culture which gives a brief introduction about the company itself, thus inducing the investor to subscribe to its IPO.
#8. Registrar to the Issue
It is a person who advises the company on the issue and closing date of an IPO. He is also in touch with the book builders on how many shares have been subscribed on a day and is responsible for collection of reports to the company and the lead managers.
#9. Lock-up Period
It refers to a period where the company after going public locks up and forbids the majority shareholders of the company to trade their respective holding in the market. Generally the lock up period is between 90 days to 180 days where the major stakeholders cannot trade their shares in the stock market.
We hope you enjoyed this article on various terminologies used in an IPO. For regular updates, subscribe us via email and we will deliver our next article, right in your mailbox!