Listing of shares in the stock market is the act of registering the share for public trading in a stock exchange. This is a very important step that brings liquidity to the share and the financial investment. The advent of online digital platforms has enhanced this liquidity many folds. A decade back stockbrokers used to jostle and shout the bids inside the stock exchange.
The Initial Public Offer (IPO) is a very important step that precedes listing. So let us study IPO in a bit more detail and revisit listing thereafter.
Initial Public Offer (IPO)
An IPO is the act of sale of its shares by the company to the public. Sometimes the original promoters may liquidate a part of their share holding along with new issue of shares by the company. In a few rare cases the sale of shares to the public may comprise of only liquidation of existing shares by promoters of the company. The following table will demonstrate the three scenarios:
An initial public offer of shares is cumbersome and time-consuming process. First of all law shall permit it. For example a private company cannot sell shares to the public. In case a private company wants to go public, it must first convert itself into a public company. Next the issue must comply with the stock market regulations and the regulators (Securities and Exchange Board of India (SEBI).
The general steps of an initial public offer in India are as follows:
The prospectus is a very important document based on which the investors decides to make an investment in the company. Therefore due care must be taken both by the company and the merchant/ investment banker. It must be factually correct. Future prospects should be estimated on a conservative basis. If things are over promised in the prospectus and if an investor suffers a financial loss he or she may file a lawsuit.
The shares are sold aggressively through stockbrokers. Today people can subscribe online, circumventing the tedious paper based process.
The company allots shares based on a process, at a price. The proportion of number of shares allotted to the number applied depends on how many times the public issue is oversubscribed.
This completes the process of sale of shares to public.
Listing in Stock Exchange
Returning back to listing, the company can list on one or more stock exchanges. In India the ‘Bombay Stock Exchange (BSE)’ and the ‘National Stock Exchange (NSE)’ are the most popular stock exchanges. BSE is the oldest and situated on the famous ‘Dalal Street’, which is the Indian version of the ‘Wall Street’ in New York, in the USA. Usually Indian companies list their shares on both the stock exchanges.
Often listing of a company’s shares in a stock exchange is accompanied pomp and ceremony. In the BSE the ceremonial bell heralds the listing.
Depending on the popularity, size, profitability and fundamental financial strengths of the company the shares after listing can trade at much higher prices than at which the investors bought them in the IPO. These are called listing gains. Many speculative investors try to profit from such gains. Indigo airline is a good example of listing gains. The issue price was Rs.765 a share. On the listing day the share opened at Rs.856 on the BSE, touched a high of Rs.898 and closed at Rs.878.45, a listing gain of 14.83%.
Sometimes these expectations backfire. Jet Airways’ share, which was issued at Rs.1100, traded on the first day at Rs.1305, a gain of 18.63%. However, the next day the share closed at Rs.420.75, less than half its issue price.
Over Pricing the Issue
In India a very bad practice of overpricing the issue is widespread. This practice resulting extracting the entire value by the company leaving very little for the investors.
India’s beigest issue, Coal India is a typical example.
Coal India shares were issued at Rs.245. On listing (4th November 2010) they opened at Rs.291 and closed at Rs.343, with a initial listing gain of 40%. Today, on 23rd June 2017, the share is languishing at Rs.244.25.
What have long-term investors gained by purchasing the shares in the last seven years?
This is not an isolated case but a normal trend.
That is why I do not buy shares through an IPO.
You will always get an opportunity to buy the shares at lesser prices at a latter date.
- Is it a good idea to purchase shares through an Initial Public Offer (IPO)?
- How to Calculate the Intrinsic Value Shares?
- You Only Find Out Who is Swimming Naked When The Tide Goes Out
- Margin of Safety
To conclude, listing of shares in a stock exchange is a process that enables trading in the shares and endows liquidity to the investment in the shares.