The Techniques of Pricing IPOs

IPOs are a hot topic in the world of finance and investing. They are often oversubscribed and can generate a lot of excitement – especially when it comes to small investors and high-net-worth individuals. An IPO is an abbreviation for “initial public offering.”

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The Indian stock market is one of the most exciting places to watch IPOs. In recent years, we have seen several high-profile IPOs that have generated a lot of interest. But what is the technique for the valuation of IPOs?

In this blog, we will take a look at the different factors that go into pricing an IPO. We will also look at how stockbrokers and other members of the investment community play a role in this process.

What factors go into pricing an IPO?

One of the most important factors that go into pricing an IPO is the company’s financials. This includes factors such as the company’s revenue, profits, margins, and growth prospects. Another important factor is the valuation of similar companies in the market.

This can be done using several methods, such as the price-to-earnings ratio or the enterprise value-to-sales ratio. Other factors that can play a role in pricing an IPO include industry trends, overall market conditions, and the expected demand from investors.

How do investment banks determine the price of an IPO?

Investment banks typically use several techniques to determine the price of an IPO. One of the most common techniques is the book-building process. In this process, the investment bank works with the company to come up with an indicative price range for the IPO. The investment bank then speaks to potential institutional investors to gauge their interest in the IPO. Based on the interest shown, the investment bank arrives at a final price for the IPO.

What are the benefits and risks of going public?

The decision to go public is a major strategic decision for any company. Several benefits come with going public. These include improved access to capital, better visibility, and a greater ability to hire and retain talent. However, there are also many risks associated with going public. These include the risk of increased regulation, the loss of privacy, and the need to meet higher standards of governance.

How can small investors participate in IPOs?

If you want to participate in an IPO, you have a few options. One of the most common is to apply through a broker. However, if you want to apply directly, you can do so after the broker deadline. Many brokers let investors apply online. Before you can make a direct application, you need to open a demat account with SEBI brokerage house. If you’re interested in participating in an IPO, there are a few different ways to do it. One of the most common ways is to apply through a broker. However, debut offers are often under-subscribed. Even after the IPO is oversubscribed, some brokers may not be able to provide clients with the allocation of shares they are entitled to.

Direct applications usually take place after the broker application deadline. Many brokers allow clients to apply online while processing their papers. Investors need to open their accounts with the Registrar of Companies before they can make direct applications.

How to buy a new IPO stock?

Once a company’s IPO is priced and its stocks become available for purchase, investors can buy the stock in the following ways:

1. Through a broker: Investors can buy the IPO stock through a broker by placing an order through the broker’s platform. The broker will facilitate the purchase of the stock on behalf of the investor.

2. Through a mutual fund: Investors who do not want to directly invest in an IPO can do so through a mutual fund that invests in IPO stocks. This allows investors to diversify their portfolios and reduce the risk associated with investing in a single IPO stock.

3. Through an IPO subscription: Many companies offer an IPO subscription to their existing shareholders before the IPO is open to the general public. This allows the existing shareholders to buy the company’s IPO stock at a discounted price.

Some notable IPOs that did well in the Indian Market

1. SBI Cards and Payment Services Ltd:

The company raised Rs 9,600 crore through its public issue in March 2020, which was the largest public issue in the Indian credit card industry. The IPO was subscribed to 155 times. The shares of the company listed at Rs 712 on the National Stock Exchange, a premium of 102% to its issue price of Rs 350 per share.

2. Happiest Minds Technologies Ltd:

The company’s IPO was subscribed 151 times, raising Rs 1,086 crore in September 2020. The shares of the company listed at Rs 351 on the BSE, a premium of 96.55% to its issue price of Rs 179 per share.

3. Nazara Technologies Ltd:

The company’s IPO was subscribed 166 times, raising Rs 594 crore in February 2021. The shares of the company listed at Rs 2,149 on the National Stock Exchange, a premium of 151.5% to its issue price of Rs 850 per share.

Wrapping things up

IPOs are a major event in the world of finance and investing. They offer a chance for companies to raise capital and for investors to get in on the ground floor of a potentially successful business.

Small investors can participate in IPOs through a number of channels, although it should be noted that the allocation of shares to small investors is often very limited.

A Demat account is a must-have for investing in an IPO. You can open a free demat and trading account with Goodwill, one of the best stock broker in India. You can enjoy the lowest brokerage charges with Goodwill. Get access to the GIGA app from Play Store or App Store, the best mobile trading platform in India.

 

To get more insights about IPOs, read our blogs:  

What are IPOs? How do they work?

How Does a Company Create New Shares During an IPO?

How to Invest in IPO Online? What are the Benefits of IPO?

What Are Pre-IPO Shares? How to Invest in Pre-IPO Shares in India?

What You Should Know About Mainboard IPO and SME IPO Before Investing

How can One Invest in a Company Before it is Listed on the Stock Exchange?

Investing in Unlisted Shares. What are Unlisted Shares? How to invest in Unlisted Shares?