What are the basics of Investment?
The money you earn is partly spent and the rest saved, for meeting the future expenses. If you keep your savings idle its nominal value remains the same but real value decreases by prevailing inflation. This can be defined by the following formula: Instead of keeping the savings idle, you park it somewhere to get a return on this capital in the future. This is called an investment. There are various avenues for investment.
You may invest in the bank deposits, postal deposits,
real estate, jewelry, paintings, life insurance, tax savings schemes likes PPF/NSC or stock market related instruments called securities like shares, debentures, bonds, etc. However, the return from each investment option depends on the associated risk. The riskier the investment, the higher will be the return. For instance, stock market related investments are risky, but makes you earn more returns than other modes of investment.
What are the benefits of investing in the stock market?
Stock Market investments offer you benefits like easy liquidity, flexibility of amounts invested/disinvested, reasonable returns and a regulatory framework to safeguard your rights. Shares are the most popular form of stock market investments due to their higher potential for capital growth.
Real rate of return = Nominal rate of return - Inflation
In the long run it is empirically found that investment in equities gives maximum return.
What is a share?
A Share or stock is a document issued by a company,
which entitles its holder to be one of the owners of the company. A share is directly issued by a company through IPO or can be purchased from the stock market. By owning a share you can earn a portion of the company's profit called dividend. Also, by buying and selling the shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.
What are the primary and secondary markets?
There are two mediums for investors to acquire shares from the primary and secondary markets. In the primary markets, securities are bought by way of the public issue directly from the company. In the secondary market shares are traded among investors. .
Who are the market players?
Investors: Retail or individual investors,
Partnership/HUF, Societies and Trusts, Companies, Mutual Funds, Financial Institutions and Foreign Institutional Investors
What is a company?
A company basically means a group of persons associated together for achieving some objectives. The term company means a company formed and registered under the Indian Companies Act 1956.
As company is a voluntary association of persons its capital is divisible into parts which are known as shares with limited liabilities. A company exists only in contemplation of law and it has no physical existence.
Tell me more about the stock market?
This is an organized set-up with a regulatory body and the members who trade in shares are registered with the stock market and regulatory body SEBI. Stock markets exist in different cities all over the world with each market having a different set of "listed" shares. Thus, the shares listed in the Bombay Stock Exchange (BSE) will be different from those in the Delhi Stock Exchange (DSE), because a company may not want to be listed in a particular stock exchange or may not fit the eligibility requirements of the particular exchange.
The stock market is also called the secondary market as it involves trading between two investors.
Is Demat a/c necessary for obtaining IPO/shares?
If issue size is more than Rs 10 crore, then you have to apply for Demat shares only. Even if the issue size is less than Rs 10 crore it is advisable to apply for shares in the Demat mode as shares are tradable only in Demat mode, apart from other benefit of Demat.
Give me a brief account of IPO process in terms of issuer's perspective. How do I apply to public issues?
When a company comes with an IPO, it prints and circulate/ distribute IPO application forms among the investors. To subscribe to an IPO, Investors have to fill an application form.
“Nobody works as hard for his money as the man who marries it”
Announcement of IPO is done through media/related the company people/friends and relatives, Draft Red Herring Prospectus, through the appointed merchant comes to market with bankers, lead managers, brokers, application forms investment consultants. After taking the decision to the collecting members or to purchase submission of the bank directly duly filled up forms along with the payment instrument, Bank credits the account. These forms are made available with Syndicate members, brokers, sub-brokers, Investment advisors and generally also available in stalls outside the stock exchanges, Banks and with vendors in various other areas. The forms can also be obtained from the websites of the company or registrar's of the issue.
Once you get the form, you have to fill it, remit the amount after calculating the number of shares applied for in the bank that is designated in the form as collecting centre for that IPO. Investors have to provide the details of their Demat account and bank account in the form. In a book built issue, the investors have choice to bid at the price as per their decisions. You can also apply for physical share if issue size is less than Rs 10 crore. If issue size is more than that you have to apply for Demat shares only. It is advisable to apply for shares in the Demat mode as shares are tradable only in Demat mode, apart from other benefit of Demat.
What is the difference between Fixed Price Issue and Book Built Issue?
An issuer company is allowed to freely price the issue. The basis of issue Price is to be disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. There is only one price and issue will be offered at that price. Such type of issue is known as Fixed Price Issue. "Book Building" means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscripttion by the issuer. This method provides an opportunity to the market to discover price for securities. Individuals who apply for the IPO put their bids.
What is "Price Band"?
The prospectus of the issuer company may contain either the floor price for the securities or a price band within which the investors can bid for the shares. The spread between the floor (minimum) and the cap (maximum) of the price band shall not be more than 20 per cent. The price band can be revised and such a revision shall be informed to the investors by informing the stock exchanges, by issuing press etc. In case the price band is revised, the bidding period need to be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.
How is the Price Band decided?
Price Band is decided by the issuer company in consultation with Merchant Bankers keeping the various factors about the issuer company in mind. The basis of issue price is disclosed in the offer document. The issuer is required to disclose in detail about the qualitative and quantitative factors taken into account in arriving the price band.
What is cut off price?
In Book building issue, the issuer company is required to indicate either the price band or a floor price in the red herring prospectus. The actual price is discovered through book building based on demand and supply. Issue price can be any price in the price band or any price above the floor price. The finally decided price by the Issuer, i.e., issue price is called "Cut Off Price". The retail individual investors have been given an option to apply for IPO at the cut off price. In short, it is the final issue price decided by the issuer.
Why shares are not allotted on the face value always?
The face value of the share of a company is generally Rs 10. It may be other than Rs 10. If the company is performing well and having good fundamentals, the shares are issued at higher price. If shares are issued at price higher than the face value, it means the shares are issued at premium.
Who determines the price?
The price of an issue is decided by the Issuer Company in consultation with the merchant banker. In the fixed price issue, the price is decided by them keeping in the mind various factors pertaining to the company. However, in the case of book built issue, the price is discovered by book-building mechanism and final price is arrived accordingly.
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