Thursday, June 22, 2017

What is Listing of Shares in Stock Market?

Business man with paper and pencil. BSE Stock Exchange in background

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:

Table showing three scenarios of initial public offers

 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 (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.

Related Articles:

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.

Monday, June 19, 2017

How to Know When Foreign Investors Will Pullout Money from Indian Stock Markets?

Rag-doll-pulling-carton-sac-of-dollars-on-top


Actual Question:


How can I know in advance if foreign investors are about to pull money out from Indian stock market?


There is a large chunk of money in Indian stock market, which are pushed by investors from foreign investment companies. Is there a way by which we can know if foreign investors are about to sell huge numbers of stock for any XYZ reason?

Answer:


Dear Friend!

The fundamental reason underlying your question is the concern about the potential steep fall in stock prices when foreign investors pull their money out from Indian stock markets. If you dig deeper you will discover that the question/ concern stems from other fundamental reasons, as follows:
  1. Investing in stocks really not intimately knowing the companies, their business models and their true value.
  2. Investing in stocks at very high valuations not knowing their intrinsic value.
  3. Investing in stocks presuming that returns from stock markets accrue only from increase in stock prices and if prices fall, investments will generate losses.
  4. Investing in stocks for short term, again with an intention of making a profit from price fluctuations.

However the problem is that nobody can predict reliably when they might do so.

While I may not be able to provide solace by reliably predicting when foreign investors may pullout their money from the Indian stock markets, I can surely show you a way:
  1. How you can be a happy investor not worried about when foreign investors are likely to pull their money out.
  2. How to invest safely and profitably in every market situation - both bull and bear markets.
  3. How instead of attempting to predict the unpredictable, you can simply react to the markets.
  4. And finally, how to surely make significant riches out of stock markets.

This sure and safe path is called ‘Value Investing’.


Buy a copy of the book, ‘The Intelligent Investor’ by Benjamin Graham. It is a masterpiece, Warren Buffett cherishes till date.

Read following articles that may completely change your attitude to investing:

To conclude, it is not possible to reliably predict when foreign investors are likely to pull their money out, but certainly possible to overcome the underlying concerns behind the question and profit form the stock markets.

Thank you,

With Best Regards,

Anand