StockMarketConcepts

INDIANMARKETOVERVIEW
Howstockmarketworks?
Howsharesaretraded?
WhatisNiftyandSensex?
Whatarestocks?
WhatmakesStockPricetoChange?
HowtodoBuyingandSellingofStocks?
DEMAT
Dematerialization
Rematerialisation
Insidertrading
Corporateactions
IPOs
Pricediscoveries
SECURITIESLENDING
Goingshort
Buyinglimit

Indianmarketoverview:
Howstockmarketworks?
Ifyou'dliketobuyashareofstockinanypubliclytradedcompanyyou'llmostlikelyneedtheservicesofabrokeragefirm.
Thoughit'spossibletobuyandsellsharesofstockonyourown,therearesomepracticalandlegalproblemswiththis
approach.Thesecuritiesindustryishighlyregulated,soyoucan'tjusthangashingleandstartsellingstockstothe
generalpublic,unlessyou'reproperlyregisteredandlicensed.
Abrokeragefirmisadealerofstocksandothersecuritiesthatactsasyouragentwhenyouwanttobuyorsellstocks.
Mosttradingofstockshappensonastockexchange.Thesearespecialmarketswherebuyersandsellersarebrought
togethertobuyandsellstocks.ThebestknownstockexchangesaretheBombayStockExchangeandtheNationalStock
Exchange.TheBombayStockExchangeisoneofthelargeststockexchangesintheworld,listingover4,500companies.
TheBSESENEXisthemajorstockindexoftheBombayexchange,comparabletotheDOWindustrialsintheUS.The
NationalStockExchangeofIndiaisalsobasedinMumbai(MumbaiusedtobecalledBombay)andregularlytradesin
volumesexceedingthatoftheBombayStockExchange.ThemainstockindexoftheNationalStockExchangeofIndiais
theS&PCNXNifty,orjustNiftyforshort.Apartfromequities,theNSEalsodealswithtradesoffutures,debtandforeign
currencies.
Whenmostpeoplethinkofastockexchange,theypictureasceneoffranticactivity,withtradersinfunnylookingjackets
simultaneouslyjostlingforposition,shoutingcommands,makingstrangehandsignals,andwritinguporders.Behindthis
frenziedspectacle,however,isamethodicalandorganizedsystemoftrading,inwhichthepriceofanystockissetpurely
byruleofsupplyanddemandinanauctionsetting.Specialistshelpmatchbuyersandsellers,butsharesarealwayssold
tothehighestbidder.
Fromtheperspectiveofaninvestor,buyingandsellingstocksseemsprettysimple.Ifyouuseafullservicebroker,just
callheruponthephoneandplaceanorderfor100sharesofCocaCola.Withinafewminutes,you'llreceivea
confirmationthatyourorderhasbeencompleted,andyou'llbetheproudnewownerofCocaCola'sstock.
Behindthescenes,however,there'salotofactionthattakesplacebetweenyourorderandtheconfirmation.Here'swhat
hastohappen:
1.Youplacetheorderwithyourbrokertobuy100sharesoftheCocaColaCompany.
2.Thebrokersendstheordertothefirm'sorderdepartment.
3.Theorderdepartmentsendstheordertothefirm'sclerkwhoworksontheflooroftheexchangewhereshares
ofCocaColaaretraded(BombayStockExchange).
4.Theclerkgivestheordertothefirm'sfloortrader,whoalsoworksontheexchangefloor.
5.Thefloortradergoestothespecialist'spostforCocaColaandfindsanotherfloortraderwhoiswillingtosell
sharesofCocaCola.
6.Thetradersagreeonaprice.

7.Theorderisexecuted.
8.Thefloortraderreportsthetradetotheclerkandtheorderdepartment.
9.Theorderdepartmentconfirmstheorderwiththebroker.
10.Thebrokerconfirmsthetradewithyou.
That'showatraditionalstockexchangeworks,butmuchoftheactionthattakesplacewhenyoubuyorsellastockis
beinghandledwiththeassistanceofcomputers.Evenifyouboughtastockthattradesonastockexchange,yourorder
maybeexecutedwithlittleornointerventionbyhumans.Youcanlogontoabrokeragefirm'sWebsite,enteranorder,
havethetradebeexecuted,andreceiveaconfirmationallwithinsixtysecondsorless.
Howsharesaretraded?
Thestockmarketistheplacewherebuyersandsellersmeet(notphysicallybutonline)anddecideonaparticularstock
priceandcarryoutbuyingandselling.Nowadaysbuyingandsellingtakesplaceonlinewiththehelpofcomputerwhere
tradesaremadeelectronicallyfromanywhereaslongasyourcomputerisconnectedtointernet.Nowdaysnophysical
floortradingtakesplace.
Furtherstockmarketsareclassifiedintotwotypes:
Primarymarketi
Secondarymarket.
Theprimarymarketiswheresharesarecreated(bymeansofanIPO).SoinprimarymarketcompanyissueanIPOand
investorpurchaseit,whileinthesecondarymarket,investorstradepreviouslyissuedshareswithouttheinvolvementof
anycompanies.Thesecondarymarketiswhatpeoplearereferringtowhentheytalkaboutthestockmarkettrading.
TermsRelatedtoStockandStockMarketTrading
OpenThefirstpriceatwhichthestockopenswhenmarketstartsinthemorning.
HighThestockpricereachedatthehighestpricelevelinaday.
LowThestockpricereachedthelowestpricelevelinaday.
CloseThestockpriceatwhichitremainsaftertheendofmarkettimingsorthefinalpriceofthestockwhenthemarket
closesforaday.
VolumeVolumeisnothingbutquantityofshares.
Bidi TheBuyingpriceiscalledasBidprice.
OfferThesellingpriceiscalledofferprice.
BidQuantityThetotalnumberofsharesavailableforbuyingiscalledBidQuantity.
OfferQuantityThetotalnumberofsharesavailableforsellingiscalledOfferQuantity.
BuyingandsellingofsharesBuyingisalsocalledasdemandorbidandsellingisalsocalledassupplyoroffer.
ShortsellingFirstsellingandthenbuyingonlyhappensindaytradingorfuturetrading
ShareTradingBuyingandsellingofsharesiscalledsharetrading.
TransactionOnecycleofbuyingandsellingofstocksiscalledOneTransaction.
SquaringoffThistermisusedtocompleteonetransaction.Meansifyoubuythenhavetosell(meanssquareoff)andif
yousellthenyouhavetobuy(meanssquareoff).
LimitOrderi Theordergetexecutesatyourmentionedprice.
MarketOrderTheorderrategetsexecutesatcurrentmarketrates.
Forexampleifyouplacebuyorderatmarketpricethenthepricewillgetexecuteswiththecurrentavailableofferprice
andwhenyouplacesellmarketorderthenyourordergetexecuteswithcurrentavailablebidprice.
ConclusionThemarketordersgetimmediatelyexecutedatthecurrentavailablepricewhilelimitorderwillexecute
whenthemarketpricewillreachyourmentionedprice.
StopLossi OrderpriceAnorderplacedtosellasharewhenitreachesacertainprice.Itisusedtolimitaninvestor's
loss.Stoplossorderisusedwithlimitorder.Itismostlyusedbydaytraders.
ForexampleSupposeyouboughtXYZsharesatRs100andunfortunatelythepricestartsfallingsotoprotectyourloss
youcanmakeuseofastoplossandputselllimitorderof95withstoplossof96.Soifpricestartsfallingandtouches96

thenyourordergetexecutedandallyourshareswillgetsoldinbetween95to96andyouwillgetprotectedfromfurther
decreaseinprice.Soinshortstoplosswillbeusedtoprotectyourheavyloss.
DisadvantageThestoplossmayalsogetexecutedbyshorttermfluctuation.
WhatisNiftyandSensex?
NiftyandSensexarecalledIndex.Indexisbasicallyanindicator.Itgivesyouageneralideaaboutwhetherthemarketis
headingtowards.InIndiaMainlytherearetwomajorIndicesNiftyandSensexinIndia.MostofthestocktradinginIndiais
doneonNSEandBSE.
TheNiftyisrelatedtoallmajorstockslistedatNSE,Delhi.
TheSensexisrelatedtoallmajorstockslistedatBSE,Mumbai.
Niftyconsistofgroupoftop50stockswhileSensexconsistof30stocks.IftheSensexgoesup,itmeansthatthepricesof
thestocksofmostofthemajorcompaniesontheBSEhavegoneup.IftheSensexgoesdown,thistellsyouthatthestock
priceofmostofthemajorstocksontheBSEhavegonedown.JustliketheSensexrepresentsthetopstocksoftheBSE,
theNiftyrepresentsthetopstocksoftheNSE.
BesidesSensexandtheNiftytherearemanyotherindexes.LikethereisanindexcalledMidCapIndexforallmidcap
stocksandSmallCapIndexforallsmallcapstocks.
AlsoforallsectorsthereisseparateindexlikeIT,banking,Pharmacyetc.Sojustbylookingattheseindicesyouwill
cometoknowwhetherthestocksfromthesesectorsaremovingupordown.
Whatarestocks?
InsimplelanguageaSTOCKisashareintheownershipofacompany.Beingastockholderyouhaveacontribution
towardscompany'sassetsandearnings.Ifyoubuymorestocksofaparticularcompanythenyourownershipstakeinthat
companybecomesgreater.Theworldstockiscalledbydifferentnameswithdifferentpeoplelikeshare,equity,scrip
andsoonbutallthesewordshavesamemeaning.
Differenttypesofstocks
Therearevariouswaysthestocksarecategorized
1.BasedonsizeofmarketcapitalizationLargecap,MidcapandSmallcap
2.DependingonsectorsBanking,Pharmacy,IT,Telecommunication.
3.MethodofstockissuePreferredandCommonstocks.
WhatmakesStockPricetoChange?
Basicfactortochangethestockpriceisdemandandsupply.Ifmorepeoplewanttobuyastock(thisiscalleddemand)
thansellit(thisiscalledsupply),thenthepricemovesupandinexactreversewayifmorepeoplewantedtosellastock
thanbuythenthepricewouldfall.
Followingaretheimportantfactorsandpointswhystockpricesmoveupanddown.
Thevariationinbuyingandsellingquantitiesmakesthestockpricemoveupanddown.
Ifmorepeoplearewillingtobuyandfewpeoplearewillingtosellmeansthereismoredemand(buyers)and
lesssupply(sellers)whichwouldmakethestockpricetoincrease.
Ifmorepeoplearewillingtosellandfewpeoplearewillingtobuymeansthereismoresupply(sellers)andless
demand(buyers)whichwouldmakethestockpricetodecrease.
Therecouldbeanyreasonswhysomepeoplewanttobuyandwhysomepeoplewanttosellthesamestock.Someare
listedbelow.
Newsrelatedtocompanythatmaybepositiveornegative.PositiveNewslikemajortakeovers,mergers,
acquisitions,negativenewslikelowprofitandsalesfiguresdeclarationinquarterorannualresults.
Somepeopletradeontechnicalchartsandbuyandsellondifferentprices.
Somepeoplemakemoveonfundamentalratios/factorssothistypeoftraderbuyandsellondifferentprices.
Somepeopleenterintomarketjustlookingthebuyingandsellingfigures(thesearecalledasvolumes)andthis
typeoftraderhavetheredifferentpricestobuyandsell.

Sometraderbuyandsellbasedonnews.
Sooveralldifferentpeopleacrosstheglobehavedifferenttradingstrategiesduetowhichstockpricesmoveup
anddown.
HowtodoBuyingandSellingofStocks
Nowwewillseehowtodotransaction(meansbuyingandselling)ofshares.
Stocktransactiontakesplacein3majorsteps.
1.Youplaceorder(buyorsell)online
2.Theordergoestoyourbroker(brokerlikeindiabulls,5paisaetc)
3.Frombrokertheordergoestostockexchange(eitherBSEorNSE)
Andfinallybasedonyourpriceyourordergetsexecuted.
Nowletsseewhatyouhavetodoforplacingorders.Yourroleistoplaceonlybuyorsellorder.Noneedtoworryabout
brokerpartandstockexchangepart.Youjustneedtoplaceyourorder.
Therearetwomethodsforplacingorders:
Onlinetradingand
Offlinetrading.
OnlineStockTradingTheonlinestocktradingisdonebyself.Ifyouwanttodotradingyourselfthenyoucangofor
onlinetrading.Foronlinetradingyouneedcomputer,Internetconnection,dematandtradingaccount.Demataccount
andtradingaccountsaremustfortradinginstockmarket.
OfflinestocktradingInthismethodtheorderswillbeplacedbythebrokeronyourbehalf.Meansyouhavetotellyour
brokerwhichstockstobuyandsellandbasedonyourinstructionhecarriesouttransaction.Inthismethodyoudont
needanycomputerandinternetconnection.
Moredetailsaboutonlinetrading
OpeningDemataccountandtradingaccountDemataccountismustifyouwanttodostocktradingorinvestment.
UseofdemataccountDemataccountisusedtokeepyourstocksinelectronicformat.Nowdaysastherearenoany
physicalsharesinpaperform,everythingisstoredelectronicallysoDemataccountisrequired.
TradingaccountTradingaccountisrequiredtodobuyingandsellingofstocks.Intodaysmarketstherearelotsof
brokerswithwhomyoucanopentheaccount.
DEMAT:
Demataccountisasafeandconvenientmeansofholdingsecuritiesjustlikeabankaccountisforfunds.Today,
practically99.9%settlement(ofshares)takesplaceondematmodeonly.Thus,itisadvisabletohaveaBeneficiary
Owner(BO)accounttotradeattheexchanges.
BankAccountVsDematAccount

S.

BasisOfDifferentiation

BankAccount

DematAccount

Funds

Securities

Safekeepingofmoney

Safekeepingofshares

No.
1.

Formof
Holdings/Deposits

2.

Usedfor

3.

Facilitates

Transfer of money (without actually handling Transferofshares(withoutactuallyhandling

money)

shares)

4.

Wheretoopen

Abankofchoice

ADPofchoice(canbeabank)

5.

RequirementofPAN

NotMandatory

Mandatory(effectivefromApril01,2006)

Number
6.

Interestaccrualon
holdings

7.

Minimumbalance
requirement

8.

Interest income is subject to the applicable rate Nointerestaccrualsonsecuritiesheldindemat

ofinterest

account

AQB* maintainance is specified for certain bank Nosuchrequirement

accounts

EitherorSurvivorfacility Available

Notavailable

*AQBAverageQuarterlyBalance
*DPDepositoryParticipant

S.

BASISOFSIMILARITY

PARTICULARS

1.

Securityi andConvenience

Bothareverysafeandconvenientmeansofholdingdeposits/securities

2.

Numberofaccounts

Nolegalbarrieronthenumberofbankordemataccountsthatcanbeopened

3.

Transferofdeposits(fundsorsecurities) Funds/securitiesaretransferredonlyattheinstructionoftheaccountholder

4.

Physicaltransferofmoney/securities

Physicaltransferofmoney/securitiesisnotinvolved

5.

NominationFacility

Available

No.

BenefitsOfDematAccount
1.Asafeandconvenientwayofholdingsecurities(equityanddebtinstrumentsboth).
2.Transactionsinvolvingphysicalsecuritiesarecostlierthanthoseinvolvingdematerialisedsecurities(justlike
thetransactionsthroughabanktellerarecostlierthanATMtransactions).Therefore,chargesapplicabletoan
investorarelesserforeachtransaction.
3.Securitiescanbetransferredataninstructionimmediately.
4.Increasedliquidity,assecuritiescanbesoldatanytimeduringthetradinghours(between9:55AMto3:30PM
onallworkingdays),andpaymentcanbereceivedinaveryshortperiodoftime.
5.Nostampdutycharges.
6.Riskslikeforgery,thefts,baddelivery,delaysintransferetc,associatedwithphysicalcertificates,are
eliminated.
7.Pledgingofsecuritiesinashortperiodoftime.
8.Reducedpaperworkandtransactioncost.
9.Oddlotsharescanalsobetraded(canbeeven1share).
10.Nominationfacilityavailable.
11.Anychangeinaddressorbankaccountdetailscanbeelectronicallyintimatedtoallcompaniesinwhich
investorholdsanysecurities,withouthavingtoinformeachofthemseparately.
12.SecuritiesaretransferredbytheDPitself,sononeedtocorrespondwiththecompanies.
13.Sharesarisingoutofbonus,split,consolidation,mergeretc.areautomaticallycreditedintothedemataccount
oftheinvestor.
14.Sharesallottedinpublicissuesaredirectlycreditedintodemataccountoftheapplicantsinquicktime.

OpeningaDematAccount
Tostartdealinginsecuritiesinelectronicform,oneneedstoopenademataccountwithaDPofhischoice.Aninvestor
alreadyhavingsharesinphysicalformshouldensurethathegetstheaccountopenedinthesamesetofnamesas
appearingonthesharecertificateotherwiseanewaccountcanbeopenedinanydesiredpatternbytheinvestor.
Gettingstarted

Documentstobeattached

ChooseaDP

Passportsizephotographs

Fill up an account opening form provided

byDP,andsignanagreementwithDPina
standard format prescribed by the
depository.

Proof of residence (POR) Any one of

Photo Ration Card with DOB / Photo
DrivingLicensewithDOB/Passportcopy/
Electricitybill/Telephonebill

DP provides the investor with a copy of

the agreement and schedule of charges
forhisfuturereference.

Proof of identity (POI) Any one of

Passportcopy/PhotoDrivingLicensewith
DOB/VotersIDCard/PANCard/Photo
RationCardwithDOB

DP opens the account and provides the

investor with a unique account number,
also known as Beneficiary Owner
IdentificationNumber(BOID).

PANcard

Note:
1.TheagreementrequiredtobesignedbytheinvestordetailstherightsanddutiesoftheinvestorandDP.
2.DPmayrevisethechargesbygivinga30dayspriornotice.SEBIhasrationalizedthecoststructureforisation
byremovingaccountopeningcharges,transactionchargesforcreditofsecuritiesandcustodycharges,effective
fromJanuary28,2005.
MaximumNumberofholdersinaDematAccount
Amaximumofthreepersonsareallowedtoopenajointdemataccountintheirnames.
Dematerialization
Definition
Dematerialisationistheprocessofconvertingphysicalshares(sharecertificates)intoanelectronicform.Sharesonce
convertedintodematerialisedformareheldinaDemataccount.
DematerialisationProcess
Aninvestorhavingsecuritiesinphysicalformmustgetthemdematerialised,ifheintendstosellthem.Thisrequiresthe
investortofillaDematRequestForm(DRF)whichisavailablewitheveryDPandsubmitthesamealongwiththephysical
certificates.EverysecurityhasanISIN(InternationalSecuritiesIdentificationNumber).Ifthereismorethanonesecurity
thantheequalnumberofDRFshastobefilledin.Thewholeprocessgoesoninthefollowingmanner:

ThingsInvestorsShouldKnowAboutAccountOpeningAndDematerialisation:
Providingthebankaccountdetailsatthetimeofaccountopening
Itismandatoryforaninvestortoprovidehisbankaccountdetailsatthetimeofopeningademataccount.Thisisdoneto
safeguardinvestor'sowninterests.Therearetwomajorreasonsforthis:
1.Theinterestanddividendwarrantscan'tbeencashedbyanyunauthorizedperson,asthebankaccount
numberismentionedonit.
2.Itisconvenientandtimesaving,asdividendsandinterestsgivenbythecompaniescanbedirectlycreditedto
theinvestor'sbankaccount(throughECSfacility,whereveravailable).
Changeinbankaccountdetails
Itispossibleforaninvestortomakechangestothedetailsofhisbankaccount.Theinvestormustinformanychangein
hisbankaccountdetailstohisDP.Thisenableshimtoreceivethecashcorporatebenefits(suchasdividends,interests)
directlyintohisaccountintimeanddiscouragesanyunauthorizedusebyanysecondparty.
ChangeintheaddressofinvestorasprovidedtotheDP
AnychangeinyouraddressshouldbeimmediatelyinformedtoDP.ThisenablesDPtomakenecessarychangesinthe
recordsandinformingtheconcernedcompaniesaboutthesame.
Openingmultipleaccounts
AninvestorisallowedtoopenmorethanoneaccountwithexistingDPorwithdifferentDPs.
Minimumbalanceofsecuritiesrequiredindemataccount
Thereisnostipulatedminimumbalanceofsecuritiestobekeptinademataccount.
Accountopeningandownershippatternofsecurities
Onemustmakesuretoopenademataccountinthesameownershippatterninwhichthephysicalsecuritiesareheld.
Forexample:Ifyouhavetwosharecertificates,oneinyourindividualname(say'X')andtheotherheldjointlywithsome
otherindividual(say'XY'),theninsuchacaseyouwillhavetoopentwodifferentaccountsinrespectiveownership
patterns(oneinyournamei.e.'X'andtheotheraccountinthenameof'XY').
Samecombinationofnamesoncertificatesbutdifferentsequenceofnamesonthecertificatesordemataccount

Regulationsprovidethattheclientreceivesacontractnoteindicatingdetailslikeordernumber,tradenumber,time,price,
brokerge,etc.within24hours.ofthetrade.Incaseofanydoubtsaboutthedetailsofthecontractnote,you(investor)can
availthefacilityprovidedbyNSE,whereinyoucanverifythetradesonNSE'swebsite.TheExchangegeneratesand
maintainsanaudittrailoforders/tradesforanumberofyears.andyoucancountercheckdetaisoforder/tradewiththe
Exchange.
Holdingajointaccounton"EitherorSurvivor"basislikeabankaccount
Noinvestorcanopenademataccounton"EorS"basislikeabankaccount.
AllowingsomebodyelsetooperateyourDemataccount
Itispossibleforanaccountholder(BeneficiaryOwner)toauthorizesomeotherpersontooperatethedemataccounton
hisbehalfbyexecutingapowerofattorney.AftersubmittingthepowerofattorneytotheDP,thatpersoncanoperatethe
accountonbehalfofthebeneficiaryowner(BO).
Addition/deletionofthenamesoftheaccountholdersafteropeningtheaccount
ItisnotpossibletomakechangesinthenamesoftheaccountholdersofaBOaccount.Anewaccounthastobeopened
inadesiredholding/ownershippattern.
ClosingademataccountandtransferofsecuritiestoanotheraccountwithsameordifferentDP
Aninvestor,ifhewants,canalsoclosehisdemataccountwithoneDPandtransferallthesecuritiestoanotheraccount
withexistingoradifferentDP.AsperaSEBIcircularissuedonNovember09,2005,therearenochargesforaccount
closureortransferofsecuritiesbyaninvestorfromoneDPtoanother
Freezing/Lockingademataccount
Theaccountholdercanfreezehisdemataccountforadesiredtimeperiod.Afrozenaccountpreventssecuritiestobe
transferredoutof(Debit)andtransferredinto(Credit)theaccount.
Dematerialisedsharesdonothaveanydistinctivenumber
Dematerialisedsecuritiesarefungibleassets.Thereforetheyareinterchangeableandidentical.
Rematerialisation
Theprocessofgettingthesecuritiesinanelectronicform,convertedbackintothephysicalformisknownas
Rematerialisation.AninvestorcanrematerialisehissharesbyfillinginaRematRequestForm(RRF).Thewholeprocess
goesonasfollows:

Note:
1.DepositoryAnorganizationthatfacilitatesholdingofsecuritiesintheelectronicformandenablesDPsto
provideservicestoinvestorsrelatingtotransactioninsecurities.TherearetwodepositoriesinIndia,namely
NSDLandCDSL.AsperaSEBIguideline,theminimumnetworthstipulatedforadepositoryisRs.100crore.
2.NSDL/CDSLThesecuritiesareheldindepositoryaccounts,likethefundsareheldinbankaccounts.There
aretwodepositoriesinIndianamelyNSDLandCDSL.NSDL(NationalSecuritiesDepositorylimited)was
establishedinAugust1996andisthefirstdepositoryinIndia.CDSL(CentralDepositorySecuritiesLimited)isthe

otherdepositoryandwasestablishedin1999.
3.DP(DepositoryParticipant)ADepositoryParticipantcanbeafinancialorganizationlikebanks,brokers,
financialinstitutions,custodians,etc.,actingasanagentoftheDepositorytomakeitsservicesavailabletothe
investors.Thereareatotalof538DPsregisteredwithSEBI,asonMarch31,2006andeachDPisassigneda
uniqueidentificationnumberknownasDPID.
PointstorememberwhileopeningtheDematandTradingaccount
FirstVeryImportantFastSupportCheckfortheresupport.Howfasttheyrespondwhenyoucontactthemthrough
emailorthroughphone.Itsveryimportantthattheyshouldrespondtoyouveryfast.Sothatyourproblemshouldget
resolvedattheearliestortheyshouldbeabletoplaceordersonyourbehalfifincaseyourcomputerorinternetstops
workingortheyshouldrespondtoyourqueriesasearlyaspossible.
SecondVeryImportantBrokeragei ratesConfirmandgoforlowbrokeragerates.Laterifyoushowgoodtransaction,
meansgoodbuyandsellingvolumes,thensomebrokersreducethebrokeragerates.
III.CheckthereliabilityCheckreliabilityandhoweasyisthetradingplatform.Tradingplatformiswhereyouputbuy
andsellorder,whereyoucanseeyourpendingordersandexecutedorders,etc.Evenyoucanrequestthebrokersto
showthedemonstrationoftheretradingplatformandafterviewingandverifyingityoucangoforthatbrokerandopen
tradingaccount.
Inadditiontobrokerageyoualsohavetopaytaxesoneverytrade.Thetaxeswillbesamewithallbrokers.
Note1Regulatorychargesarecalculatedontotaltransaction(buyingandselling),whichisalsocalledastotalturnover
amount.
Note2Youhavetopayservicetaxonlyonbrokerage.
InsiderTrading:
Insidertradingcanbeillegalorlegaldependingonwhentheinsidermakesthetrade:itisillegalwhenthematerial
informationisstillnonpublictradingwhilehavingspecialknowledgeisunfairtootherinvestorswhodon'thaveaccessto
suchknowledge.Illegalinsidertradingthereforeincludestippingotherswhenyouhaveanysortofnonpublicinformation.
Directorsarenottheonlyoneswhohavethepotentialtobeconvictedofinsidertrading.Peoplesuchasbrokersand
evenfamilymemberscanbeguilty.
Insidertradingislegaloncethematerialinformationhasbeenmadepublic,atwhichtimetheinsiderhasnodirect
advantageoverotherinvestors.TheSEC(SecuritiesExchangeCommissioni ),however,stillrequiresallinsiderstoreport
alltheirtransactions.So,asinsidershaveaninsightintotheworkingsoftheircompany,itmaybewiseforaninvestorto
lookatthesereportstoseehowinsidersarelegallytradingtheirstock.
Corporateactions:
Whenapubliclytradedcompanyissuesacorporateaction,itisinitiatingaprocessthatwillbringactualchangetoits
stock.Byunderstandingthesedifferenttypesofprocessesandtheireffects,aninvestorcanhaveaclearerpictureofwhat
acorporateactionindicatesaboutacompany'sfinancialaffairsandhowthatactionwillinfluencethecompany'sshare
priceandperformance.Thisknowledge,inturn,willaidtheinvestorindeterminingwhethertobuyorsellthestockin
question.
Corporateactionsaretypicallyagreeduponbyacompany'sboardofdirectorsandauthorizedbytheshareholders.Some
examplesarestocksplits,dividends,mergersandacquisitions,rightsissuesandspinoffs.Let'stakeacloserlookat
thesedifferentexamplesofcorporateactions.
StockSplits:
Asthenameimplies,astocksplit(alsoreferredtoasabonusshare)divideseachoftheoutstandingsharesofa
company,therebyloweringthepricepersharethemarketwilladjustthepriceonthedaytheactionisimplemented.A
stocksplit,however,isanonevent,meaningthatitdoesnotaffectacompany'sequity,oritsmarketcapitalization.Only
thenumberofsharesoutstandingchange,soastocksplitdoesnotdirectlychangethevalueornetassetsofacompany.
Acompanyannouncinga2for1(2:1)stocksplit,forexample,willdistributeanadditionalshareforeveryone
outstandingshare,sothetotalsharesoutstandingwilldouble.Ifthecompanyhad50sharesoutstanding,itwillhave100

afterthestocksplit.Atthesametime,becausethevalueofthecompanyanditssharesdidnotchange,thepriceper
sharewilldropbyhalf.Soifthepresplitpricewas$100pershare,thenewpricewillbe$50pershare.
Sowhywouldafirmissuesuchanaction?Moreoftenthannot,theboardofdirectorswillapprove(andtheshareholders
willauthorize)astocksplitinordertoincreasetheliquidityoftheshareonthemarket.
Theresultofthe2for1stocksplitinourexampleaboveistwofold:(1)thedropinsharepricewillmakethestockmore
attractivetoawiderpoolofinvestors,and(2)theincreaseinavailablesharesoutstandingonthestockexchangewill
makethestockmoreavailabletointerestedbuyers.Sodokeepinmindthatthevalueofthecompany,oritsmarket
capitalization(sharesoutstandingxmarketprice/share),doesnotchange,butthegreaterliquidityandhigherdemandon
thesharewilltypicallydrivethesharepriceup,therebyincreasingthecompany'smarketcapitalizationandvalue.
Asplitcanalsobereferredtoinpercentageterms.Thus,a2for1(2:1)splitcanalsobetermedastocksplitof100%.A3
for2split(3:2)wouldbea50%split,andsoon.
Areversesplitmightbeimplementedbyacompanythatwouldliketoincreasethepriceofitsshares.Ifa$1stockhada
reversesplitof1for10(1:10),holderswouldhavetotradein10oftheiroldsharesforonenewone,butthestockwould
increasefrom$1to$10pershare(retainingthesamemarketcapitalization).Acompanymaydecidetouseareverse
splittosheditsstatusasa"pennystock".Othertimescompaniesmayuseareversesplittodriveoutsmallinvestors.
Dividends:
Therearetwotypesofdividendsacompanycanissue:cashandstockdividends.Typicallyonlyoneortheotherisissued
ataspecificperiodoftime(eitherquarterly,biannuallyoryearly)butbothmayoccursimultaneously.Whenadividendis
declaredandissued,theequityofacompanyisaffectedbecausethedistributableequity(retainedearningsand/orpaid
incapital)isreduced.Acashdividendisstraightforward.Foreachshareowned,acertainamountofmoneyisdistributed
toeachshareholder.Thus,ifaninvestorowns100sharesandthecashdividendis$0.50pershare,theownerwill
receive$50intotal.
Astockdividendalsocomesfromdistributableequitybutintheformofstockinsteadofcash.Astockdividendof10%,for
example,meansthatforevery10sharesowned,theshareholderreceivesanadditionalshare.Ifthecompanyhas
1,000,000sharesoutstanding(commonstock),thestockdividendwouldincreasethecompany'soutstandingsharestoa
totalof1,100,000.Theincreaseinsharesoutstanding,however,dilutestheearningspershare,sothestockpricewould
decrease.
Thedistributionofacashdividendcansignaltoaninvestorthatthecompanyhassubstantialretainedearningsfrom
whichtheshareholderscandirectlybenefit.Byusingitsretainedcapitalorpaidincapitalaccount,acompanyis
indicatingthatitcanreplacethosefundsinthefuture.Atthesametime,however,whenagrowthstockstartstoissue
dividends,thecompanymaybechanging:ifitwasarapidlygrowingcompany,anewlydeclareddividendmayindicate
thatthecompanyhasreachedastablelevelofgrowththatitissustainableintothefuture.
RightsIssuesi :
Acompanyimplementingarightsissueisofferingadditionaland/ornewsharesbutonlytoalreadyexistingshareholders.
Theexistingshareholdersaregiventherighttopurchaseorreceivethesesharesbeforetheyareofferedtothepublic.A
rightsissueregularlytakesplaceintheformofastocksplit,andcanindicatethatexistingshareholdersarebeingoffered
achancetotakeadvantageofapromisingnewdevelopment.
MergersandAcquisitions:
Amergeroccurswhentwoormorecompaniescombineintoonewhileallpartiesinvolvedmutuallyagreetothetermsof
themerge.Themergeusuallyoccurswhenonecompanysurrendersitsstocktotheother.Ifacompanyundergoesa
merger,itmayindicatetoshareholdersthatthecompanyhasconfidenceinitsabilitytotakeonmoreresponsibilities.On
theotherhand,amergercouldalsoindicateashrinkingindustryinwhichsmallercompaniesarebeingcombinedwith
largercorporations.Formoreinformation,see"Whathappenstothestockpriceofcompaniesthataremergingtogether?"
Inthecaseofanacquisition,however,acompanyseeksoutandbuysamajoritystakeofatargetcompany'ssharesthe
sharesarenotswappedormerged.Acquisitionscanoftenbefriendlybutalsohostile,meaningthattheacquired
companydoesnotfinditfavorablethatamajorityofitsshareswasboughtbyanotherentity.

Areversemergercanalsooccur.Thishappenswhenaprivatecompanyacquiresanalreadypubliclylistedcompany
(albeitonethatisnotsuccessful).Theprivatecompanyinessenceturnsintothepubliclytradedcompanytogaintrading
statuswithouthavingtogothroughthetediousprocessoftheinitialpublicoffering.Thus,theprivatecompanymerges
withthepubliccompany,whichisusuallyashellatthetimeofthemerger,andusuallychangesitsnameandissuesnew
shares.
SpinOffs:
Aspinoffoccurswhenanexistingpubliclytradedcompanysellsapartofitsassetsordistributesnewsharesinorderto
createanewlyindependentcompany.Oftenthenewshareswillbeofferedthrougharightsissuetoexistingshareholders
beforetheyareofferedtonewinvestors(ifatall).Dependingonthesituation,aspinoffcouldbeindicativeofacompany
readytotakeonanewchallengeoronethatisrestructuringorrefocusingtheactivitiesofthemainbusiness.
Itisimportantforaninvestortounderstandthevarioustypesofcorporateactionsinordertogetaclearerpictureofhowa
company'sdecisionsaffecttheshareholder.Thetypeofactionusedcantelltheinvestoralotaboutthecompany,andall
actionswillchangethestockitselfonewayoranother.
Assimilation:
Absorptionofanewissueofstockintotheparentsecuritywheretheoriginalsharesdidnotfullyrankparipassuwiththe
parentshares.Aftertheevent,theassimilatedsharesrankparipassuwiththeparent.Itisalsoreferredtoasfungingof
shares.
Acquisition:
Ingeneral,companieswillaimtogrow.Growthcanbeachievedorganically(thecompanysimplygrowthstheirexisting
company)orinorganically(byacquiringotheralreadyexistingbusinessesandintegratethemwiththeirown).
Inordertoexcecuteanacquisitionstrategy,theacquiringcompanymayuseseveralmeans:amerger,atakeoverbid
(usuallybyannouncingaTenderOfferoranExchangeOffer)whichareallCorporateActionsEvents.
Bankruptcy:
Thecompanyannouncesbankruptcyprotectionandthelegalproceedingsstartinwhichitwillbedecidedwhatpayouts
willbepaidtostakeholders.ABankruptcy(alsoreferredtoasaninsolvencyordefault)istheinabilityofanindividualor
entitytopayitsdebtswhentheyaredue.Itdoesnotalwaysresultinliquidation.Analternativeisreorganization,inwhich
thefirmsobligationsmayberenegotiated.

Usuallyaspecializedandqualifiedlawyerisappointedwhohandlestheproceedings.Thislawyerisknownasan
insolvencypractitioner.

Anypartythathasclaimsoutstandingcanfileaclaim.IncaseofLiquidation,allassetswillbesoldbytheinsolvency
practitioner.Ifafterallthedebthasbeenpaidoffthereissomethingleft,thiswillbepaidoutasproceedstoequity
holders.
Bonusi Issue:
Shareholdersareawardedadditionalsecurities(shares,rightsorwarrants)freeofpayment.Thenominalvalueofshares
doesnotchange.

ABonusIssue,whichissometimesreferredtoas"ScripIssue"or"CapitalisationIssue",iseffectivelyafreeissueof
sharespaidforbythecompanyissuingthesharesoutofcapitalreserves.

PleasenotethataBonusIssueshouldNOTbeseenasaDividend,likeforexampleaSTOCKDIVIDENDevent.

AcompanycallsaBonusIssuetoincreasetheliquidityofthecompany'ssharesinthemarket.Increasingthenumberof
sharesincirculationreducestheshareprice.
Theterm'BonusIssue'isgenerallyusedtodescribewhatistechnicallyacapitalisationofreserves.Thecompany,in
effect,issuesfreesharespaidforoutofitsaccumulatedprofits(reserves).
BonusRights:

Distributionofrightswhichprovideexistingshareholderstheprivilegetosubscribetoadditionalsharesatadiscounted
rate.Thiscorporateactionhassimilarfeaturestoabonusandrightsissue.
ClassAction
Alawsuitisbeingmadeagainstthecompany(usuallybyalargegroupofshareholdersorbyarepresentativepersonor
organisation)thatmayresultinapaymenttotheshareholders.
Delisting
Theprocessofremovingthesecurityfromastockexchange.ThiscanbedoneonamandatorybasisbytheExchangeor
onavoluntarybasisbythecompanyitself.Afterastockhasbeendelisteditcannolongerbetradedonthatexchange
andnoofficialonexchangepricebuildingisbeingtracked.
Demerger
Onecompanydemergesitselfinto2ormorecompanies.Thesharesoftheoldcompanyarebookedoutandtheshares
ofthenewcompanieswillbebookedinaccordingtoasetratio.
GeneralAnnouncement
Aneventusedbythecompanytonotifyitsshareholdersofanyeventsthattakeplace.Thiseventtypeisusedto
communicateseveraltypesofinformationtotheshareholders.

InitialPublicOffering(IPO)
Thisisthefirstcorporateactionseventinthehistoryofanycompany.Thefirsttimethatacompanygetslistedonastock
exchangeisregardedasaneventinitself.Underwriterswilltrytogetasmanybuyersforthenewlylistedsharesfora
priceashighaspossible.Anysharestheycannotsell,willbeboughtbytheunderwriters.
Liquidation
Liquidationproceedingsconsistofadistributionofcashand/orassets.Debtmaybepaidinorderofprioritybasedon
preferredclaimstoassetsspecifiedbythesecuritye.g.ordinarysharesversuspreferredshares.
MandatoryExchange/MandatoryConversion
Conversionofsecurities(generallyconvertiblebondsorpreferredshares)intoasetnumberofotherformsofsecurities
(usuallycommonshares).
Merger
Mergerof2ormorecompaniesintoonenewcompany.Thesharesoftheoldcompaniesareconsequentlyexchanged
intosharesinthenewcompanyaccordingtoasetratio.
ParValueChange
Similartostocksplitswherethesharenominalvalueischangedwhichnormallyresultsinachangeinthenumberof
sharesheld.
SchemeofArrangement
Occurswhenaparentcompanytakesoveritssubsidiariesanddistributesproceedstoitsshareholders.
ScripDividend
TheUKversionofanoptionaldividend.Nostockdividends/couponsareissuedbuttheshareholdercanelecttoreceive
eithercashornewsharesbasedontheratioorbythenetdividenddividedbythereinvestmentprice.Thedefaultis
alwayscash.
ScripIssue
Shareholdersareawardedadditionalsecurities(shares,rightsorwarrants)freeofpayment.Thenominalvalueofshares
doesnotchange.
IPOs:
Corporatemayraisecapitalintheprimarymarketbywayofaninitialpublicoffer,rightsissueorprivateplacement.An
InitialPublicOffer(IPO)isthesellingofsecuritiestothepublicintheprimarymarket.
IPOorInitialPublicOfferisawayforacompanytoraisemoneyfrominvestorsforitsfutureprojectsandgetlistedtoStock

Exchange.OrAnInitialPublicOffer(IPO)isthesellingofsecuritiestothepublicintheprimarystockmarket.
CompanyraisingmoneythroughIPOisalsocalledascompanygoingpublic'.
Fromaninvestorpointofview,IPOgivesachancetobuysharesofacompany,directlyfromthecompanyatthepriceof
theirchoice(InbookbuildIPO's).Manyatimesthereisabigdifferencebetweenthepriceatwhichcompaniesdecidesfor
itssharesandthepriceonwhichinvestorarewillingtobuyshareandthatgivesagoodlistinggainforsharesallocated
totheinvestorinIPO.
Fromacompanyprospective,IPOhelpthemtoidentifytheirrealvaluewhichisdecidedbymillionsofinvestoroncetheir
sharesarelistedinstockexchanges.IPO'salsoprovidefundsfortheirfuturegrowthorforpayingtheirprevious
borrowings.
IPOProcess:
1.IssuerCompanyIPOProcessInitialization
1.Appointleadmanagerasbookrunner.
2.Appointregistraroftheissue.
3.Appointsyndicatemembers.
2.LeadManager'sPreIssueRolePart1
1.PreparedraftofferprospectusdocumentforIPO.
2.FiledraftofferprospectuswithSEBI.
3.RoadshowsfortheIPO.
3.SEBIProspectusReview
1.SEBIreviewdraftofferprospectus.
2.RevertitbacktoLeadManagerifneedclarificationorchanges(Step2).
3.SEBIapprovethedraftofferprospectus,thedraftofferprospectusisnowbecomeOfferProspectus.
4.LeadManagerPreIssueRolePart2
1.SubmittheOfferProspectustoStockExchanges,registraroftheissueandgetitapproved.
2.Decidetheissuedate&issuepricebandwiththehelpofIssuerCompany.
3.ModifyOfferProspectuswithdateandpriceband.DocumentisnowcalledRedHerringProspectus.
4.RedHerringProspectus&IPOApplicationFormsareprintedandpostedtosyndicatemembersthrough
whichtheyaredistributedtoinvestors.
5.InvestorBiddingforthepublicissue
1.PublicIssueOpenforinvestorsbidding.
2.Investorsfilltheapplicationformsandplaceorderstothesyndicatemembers(syndicatememberlistis
publishedontheapplicationform).
3.SyndicatemembersprovidethebiddinginformationtoBSE/NSEelectronicallyandbiddingstatusgets
updatedonBSE/NSEwebsites.
4.Syndicatememberssendallthephysicallyfilledformsandchequestotheregistraroftheissue.
5.InvestorcanrevisethebiddingbyfillingaformandsubmittingittoSyndicatemember.
6.Syndicatememberskeepupdatingstockexchangewiththelatestdata.
7.PublicIssueClosesforinvestorsbidding.
6.LeadManagerPriceFixing
1.Basedonthebidsreceived,leadmanagersevaluatethefinalissueprice.

2.Leadmanagersupdatethe'RedHerringProspectus'withthefinalissuepriceandsendittoSEBIand
StockExchanges.
7.RegistrarProcessingIPOApplications
1.Registrarreceivesallapplicationforms&chequesfromSyndicatemembers.
2.Theyfeedapplicantdata&additionalbiddinginformationoncomputersystems.
3.Sendthechequesforclearance.
4.Findallbogusapplication.
5.Finalizethepatternforshareallotmentbasedonallvalidbidreceived.
6.Prepare'BasisofAllotment'.
7.Transfersharesinthedemataccountofinvestors.
8.RefundtheremainingmoneythoughECSorCheques.
8.LeadmanagerStockListing
1.Onceallallocatedsharesaretransferredininvestorsdpaccounts,LeadManagerwiththehelpofStock
ExchangedecidesIssueListingDate.
2.FinallyshareoftheissuercompanygetslistedinStockMarket.
InitialPublicOfferingcanbemadethroughthefixedpricemethod,bookbuildingmethodoracombinationofboth.There
aretwotypesofPublicIssues:

ISSUETYPE

OFFERPRICE

DEMAND

PAYMENT

RESERVATIONS

FixedPriceIssues

Price at which
the
securities
are offered and
would
be
allotted is made

Demandforthe
securities
offered
is
known
only
after
the

100 % advance
payment
is
required to be
made by the
investors at the

50 % of the shares offered

are
reserved
for
applications below Rs. 1
lakh and the balance for
higher
amount

known
in closure of the time
advance to the issue
application.
investors
BookBuildingIssues A 20 % price Demandforthe 10

of applications.

advance 50 % of shares offered are

band is offered
by the issuer
within
which
investors
are
allowed to bid

securities
offered,andat
various prices,
isavailableona
real time basis

payment
is
required to be
made by the QIBs
along with the
application, while

and the final

price
is
determined by
the issuer only
after closure of

on the BSE
website during
the
bidding
period..

other categories
of investors have
to pay 100 %
advance
along
with
the

thebidding.

reservedforQIBS,35%for
small investors and the
balance for all other
investors.

application.

PriceBand:
Companywithhelpofleadmanagers(merchantbankersorsyndicatemembers)decidesthepriceorpricebandofan
IPO.

SEBI,theregulatoryauthorityinIndiaorStockExchangesdonotplayanyroleinfixingthepriceofapublicissue.SEBI
justvalidatethecontentoftheIPOprospectus.
Companiesandleadmanagersdoeslotsofmarketresearchandroadshowsbeforetheydecidetheappropriatepricefor
theIPO.CompaniescarryahighriskofIPOfailureiftheyaskforhigherpremium.Manyatimeinvestorsdonotlikethe
companyortheissuepriceanddoesn'tapplyforit,resultingunsubscribeorundersubscribedissue.Inthiscase
companies'eitherrevisestheissuepriceorsuspendstheIPO.
Dateoftheissue:
OnceDraftProspectus'ofanIPOisclearedbySEBIandapprovedbyStockExchangesthenit'suptocompanygoing
publictofinalizethedateanddurationofanIPO.CompanyconsultwiththeLeadManagers,Registraroftheissueand
StockExchangesbeforedecidesthedate.
RoleofregistrarofanIPO:
RegistrarofapublicissueisaprimebodyinprocessingIPO's.Theyareindependentfinancialinstitutionregisteredwith
SEBIandstockexchanges.Theyareappointedbythecompanygoingpublic.
ResponsibilityofaregistrarforanIPOismainlyinvolvesprocessingofIPOapplications,allocatesharestoapplicants
basedonSEBIguidelines,processrefundsthroughECSorchequeandtransferallocatedsharestoinvestorsDemat
accounts.
RoleofLeadManagersinanIPO:
Leadmanagersareindependentfinancialinstitutionappointedbythecompanygoingpublic.Companiesappointmore
thenoneleadmanagertomanagebigIPO's.TheyareknownasBookRunningLeadManagerandCoBookRunning
LeadManagers.
TheirmainresponsibilitiesaretoinitiatetheIPOprocessing,helpcompanyinroadshows,creatingdraftofferdocument
andgetitapprovebySEBIandstockexchangesandhelpingcompanytolistsharesatstockmarket.
FollowonpublicofferingorFPO:
Followonpublicoffering(FPO)ispublicissueofsharesforalreadylistedcompany.
Primary&secondarymarket:
Primarymarketisthemarketwheresharesareofferedtoinvestorsbytheissuercompanytoraisetheircapital.
Secondarymarketisthemarketwherestocksaretradedaftertheyareinitiallyofferedtotheinvestorinprimarymarket
(IPO'setc.)andgetlistedtostockexchange.Secondarymarketcomprisesofequitymarketsandthedebtmarkets.
Secondarymarketisaplatformtotradelistedequities,whilePrimarymarketisthewayforcompaniestoenterinto
secondarymarket.
LifecycleofanIPOprospectus:
Stage1:DraftOfferdocument
"DraftOfferdocument"ispreparedbyIssuerCompanyandtheBookBuildingLeadManagerofthepublicissue.This
documentissubmittedtoSEBIforreview.AfterreviewingthisdocumenteitherSEBIaskleadmanagerstomakechanges
toitorapproveittogoaheadwithIPOprocessing.
DraftdocumentareavailableonSEBI'swebsiteinthesectionofReports>PublicIssues:DraftOfferDocumentsfiled
withSEBI"at:http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70
"DraftOfferdocument"isusuallyaPDFfilehavinginformationofaninvestorwhoneedstoknowaboutthepublicissue.It
mainlycontaininformationaboutthecompany,itsbusiness,management,riskinvolveinapplyingtothisissue,company
financialsandthereasonwhycompanyisraisingmoneythroughIPO.
Stage2:OfferDocument
OncetheDraftOfferdocument'clearedbySEBI,itbecomes"OfferDocument".OfferDocumentisthemodifiedversionof
DraftOfferdocument'withSEBIsuggestions.
"OfferDocument"issubmittedtotheregistraroftheissueandstockexchangeswhereIssuerCompanyiswillingtolist.
Stage3:RedHerringProspectus
Once"OfferDocument"getsclearancefromStockExchanges,IssuerCompanyaddIssuesizeandpriceoftheissueto
thedocumentandmakeitavailabletothepublic.Theissueprospectusisnowcalled"RedHerringProspectus"
BenefitsofIPOs:
Forbusinesses,stocksandsharesareafastwaytoraiserevenueforbusinessexpansionandgrowth.Theyalsocantake
abusinesstothenextlevel.Bybecomingapubliclytradedcompanyabusinesscantakeadvantageofnew,larger
opportunitiesandcanstartworkingtowardsincorporationandevenworldwideexpansion.IPOgivesacompanyfast
accesstopubliccapital.Eventhoughpublicofferingcanbecostlyandtimeconsuming,thetradeoffsareveryappealing
tocompanies.IPOsarealsoarelativelylowriskforbusinessesandhavethepotentialforhugegainsandforhuge
opportunities.Themoreinvestorswishtoinvestinacompany,themorethecompanystandstoorfromIPOsandother

stockofferings.
Fortheinvestor,IPOsareattractivemainlybecausetheymaybeundervalued.Initially,tomakeIPOsmoreattractive,
manycompanieswilloffertheirinitialpublicofferingatalowrate.Thishelpstoencourageinvestors,andinvestorswill
oftenbuyIPOs,thinkingthatthenewcompanyorthenewlypubliccompanywillbethenextbigthingwithahugeprofit
margin.AspricesgrowanddemandfortheIPOsgrows,earlyinvestorsstandtomakealotofprofitandveryquickly.
Ifyouhopetoinvestincompanies,understandingtheanswertothequestionwhatisanIPO?isessentialtoyoursuccess.
Aninitialpublicoffering,thefirsttimeacompanyofferssharestothegeneralpublic,isagreatwaytostartbuildingprofit.
SinceIPOsareinsomecasesundervaluedtheycanoftenbesoldwithitashortperiodforgoodprofit.
PriceDiscovery:
Themostimportant,yetmostdifficult,partoftheinitialpublicoffering(IPO)processissettingtheofferprice.InanIPO,the
issuer,aidedbyanintermediatinginvestmentbank,planstosellarelativelylargenumberofsharesofcommonstockin
whichthereisatthatpointnomarket.However,theyknowthatsoonaftertheIPOprocessthesecondarymarketwill
imputealltheinformationinthemarketinanefficientmanner.Investorswhobelievethepricetobetoohighwillsell
investorswhobelievethepricetobetoolowwillbuy.Thekeyoutcomeofthiscompetitivetradingisthemarketpriceof
thestock.
Naturally,theissuingteam(theissueranditsinvestmentbankwouldliketoknowthemarketpriceinadvance.Iftheyhad
acrystalball,theywouldsetthepriceatasmalldiscount(say3%)tothefuturemarketprice,soastogeneratesufficient
interestfrombuysideclients,andplacetheissue.Infactthisisexactlywhatissuersdowhentheysellsecuritieswhich
alreadyhaveamarketprice.Unfortunately,thereisnosecondarymarketforIPOshares,andneitheraretherecrystal
balls.
Toestimatethemarketpriceasbestastheycan,issuersandtheiradvisersconductacostlyanalysistoestimatethe
valueofthefirm.Wecallthisprocesspricediscovery.
Notethatnotonlydotheissueranditsinvestmentbankanalyzethefirm.Prospectiveinvestorsalsoconductcostly
analysistopredictthefuturemarketprice.Naturally,agoodestimateofthefuturemarketpricegivesthemasubstantial
advantageintheirdealingswiththeissuer:Iftheyhavestrongindicationsthattheofferpriceissettoohigh,theystay
awayfromtheoffering.Iftheybelievethepricetobebelowthefuturemarketprice,theysignupforIPOshares
enthusiastically.
Securitieslending:
Goingshort
Sellingstockthataninvestordoesnotownbyborrowingsharesfromabroker.Theassumptionisthatthepricewillfall.
Theinvestoranticipatesbuying(coveringtheshort)thesharesbackatalowerpricethanwhattheyweresoldfor,
recognizingthedifferenceasaprofit.Antithesisisgoinglong.
BuyingLimit
Alimitorderisanordertobuyasecurityatnomorethanaspecificprice,ortosellasecurityatnolessthanaspecific
price.Thisgivesthetrader(customer)controloverthepriceatwhichthetradeisexecutedhowever,theordermaynever
beexecuted("filled").Limitordersareusedwhenthetraderwishestocontrolpriceratherthancertaintyofexecution.
Abuylimitordercanonlybeexecutedatthelimitpriceorlower.Forexample,ifaninvestorwantstobuyastock,but
doesn'twanttopaymorethan$20forit,theinvestorcanplacealimitordertobuythestockat$20"orbetter".Byentering
alimitorderratherthanamarketorder,theinvestorwillnotbuythestockatahigherprice,but,maygetfewersharesthan
hewantsornotgetthestockatall