The first time a Company sells its stock to the public is known as an initial public offer. These are mainly launched by Companies which are new, but have a very sound business model and see vast scope for expansion in their business.
An Initial Public Offering could also be launched by a Company which has been in business for a while but wants to raise additional capital by selling part of its ownership to the public. The Company launches an IPO which is called "Going Public" and raises capital by selling the stake in the Company to the public.
The Company first targets people or institutions with a lot of money. These are called Qualified Institutional Buyers.
Mutual fund houses, Banks, pension funds, Insurers and even venture capital funds are qualified institutional buyers. At least 60% of the size of the issue needs to be subscribed (offered) to the Qualified Institutional Buyers if the price is decided by the book building method.
IPO gives you an opportunity to invest, right at the time the Company is listed. Ride on the growth of the Company and earn good returns.
IPO's are launched when there is a boom in the stock market. You can ride the bull if you invest in a good IPO.
Some IPO's carry risk, some do not. If you do your research, you can invest in good IPO's and get good returns at a lower risk.
If you invest in a good IPO, you automatically invest with the buy low, sell high approach. Buying low and selling high, gives good profit.
Anchor investors are a part of the qualified institutional buyers (QIB) and aid the price discovery process .Before the book building process is launched, the floor price and the cap price need to be determined. The QIB's and the anchor investors help to fix these prices.
In any field especially business, big names and big reputations serve as a boost to investments .In the same way anchor investors serve as an anchor or a support to the IPO. According to SEBI rules and guidelines, anchor investors need to stay invested for a period of at least 30 days. This protects retail investors from a sharp fall in prices due to excessive selling by the anchor investors.
The method of price discovery (Finding the prices of the equity shares of the Company), is called book building. The optimum prices of the shares of the Company have to be fixed through a process known as book building.
A price range known as a price band is decided by the Company. It has a lower limit and an upper limit .The lower price (The shares will not be offered at a price lower than this), is called the floor price.
The upper price (The upper limit of the pricing of the shares), is called the ceiling price. Shares of the Company are offered within the price band.
You can bid only between the floor price and the ceiling price. The issue is then closed for subscription. The cut off price is then decided by the Company issuing the shares and the lead manager to the issue, based on the interest and the appetite of the investors to the equity (share) issue by the Company.
All investors who have submitted bids at and above the cut off price, are able to procure the shares of the Company. If you are a retail investor, then you can also apply at the cut off price (you are ready to purchase at the price decided by the Company and the lead manager to the issue).
If you have applied at the ceiling price and the cut off price is less than the ceiling price, then the excess money is refunded to your account.
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