What is Listing of Shares in Stock Market?

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.

Listing Gains

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 (4^th November 2010) they opened at Rs.291 and closed at Rs.343, with a initial listing gain of 40%. Today, on 23^rd 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.

Related Articles:

• 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.

Is it Good to Subscribe to the Upcoming IPO?

Investor Subscribing to IPO Online Platform of Stock Exchange

Recently a professional colleague asked me if it is good to subscribe to a certain upcoming IPO. He mentioned that he always keeps a close tab on the IPO calendar as IPO stocks have always fetched him handsome returns, and he eagerly looks forward to new IPOs.

My answer is an emphatic NO!

People may argue that many good issues have yielded handsome returns or gains on listing – meaning the shares traded on the stock exchange at a price over and above the IPO offer price. 

Listing Gain should not be the Reason for Investing

I don’t deny that it is possible for a particular issue to trade at a higher price, for a short time.  But again it is fundamental difference in approach between a trader and value investor.  The question is not about price.  It is about value.  The question is whether the share being offered for subscription is at or near its fair or intrinsic value?  What price to earnings (PE) multiple is it sold? Is it ten times or near about ten times the earnings per share (EPS)?  The answer invariably is a no.  

Mostly IPO Stocks are offered at not less than a PE of 20 and some times it may go as high as 40 times the earnings.  In simple language, a PE of 20 means it will take 20 years for the company to earn the investment back for the investor, and a multiple of 40 means forty years.  To complicate the matter further, PE and EPS refer only to earnings by the company and not by the investor.  

Considering that companies hardly distribute more than 25% of their earnings to shareholders as dividends, it will take four times more number of years for the investors to recover their own investment!  Whereas the simple fixed deposit with a bank will recover the investment in 10 years, in India, assuming an interest rate of 10% per annum.  Of course, we have considered only the earnings and dividends in this analysis and not price increase either on the back of growth in earnings or otherwise.

One can Buy IPO stock Much Cheaper on the Stock Market

Even if we go by traded price on the exchanges, history shows that in the medium to long term, mostly IPO shares loose their value significantly.  One could easily buy the same shares at less than half their issue price if not more, in a few years. 

Value – that is any potential for future price growth - is almost fully extracted by the IPO company and investors are left high and dry either with losses or minimal gains. Ironically, it is not different even in the case of government owned or public sector companies.  This sorry state of affairs may be attributable more to the merchant bankers and advisors to the issue rather than the companies or their promoters or managers.

In the Coal India IPO of the year 2010, the price was fixed at Rs.245 a share.  It was billed as India’s largest IPO.  The company raised over Rs.15,000/- crores ( Rs.150 billion). The issue was over subscribed by 15.28 times. 

For the financial year ended on 31^st March 2010, the company had declared earnings per (EPS) share of Rs.5.97 and book value of the share was Rs.14.67. 

It means that the shares were issued at a PE multiple of 41.03 times (245÷5.97) and a price to book multiple of 16.70 times.  Whereas, the prescribed limits in value investing, are just 10 times PE multiple and 1.5 times the book value.  This mean the fair value of the share in the IPO was not more than Rs.60.

Today (Friday, 6^th May 2016) the closing price of Coal India share was Rs.281.95.  The share is trading at a PE multiple of 14.81 times and a price to book value multiple of 4.41.  Assuming that the EPS has remained constant 1t Rs.5.97, applying this PE multiple you could have bought the same share in the open market at Rs.88.41.

Conclusion

In the light of the above discussion with example it becomes amply clear that my friend's contention of watching the IPO calendar as IPO stocks have always fetched him handsome returns, and he eagerly looks forward to new IPOs, does not hold good, The answer to the question, "Is it Good to Subscribe to the Upcoming IPO?" is a definite no.