Hello Investors,
‘This Articles’ aims to keep investors informed about demat and various aspects of financial markets in general. New demat accounts opened in FY 2020–21 have shown an interesting trend of increased participation of retail investors in the capital market. The upward journey of stock market indices has resulted in many companies launching their IPOs during FY 2020–21. Many of you would be aware of the recent spate of IPOs that have made a debut on the Indian stock markets. This includes several trusted and legacy companies as well as new-age internet companies.
And the trend of new IPO looks like continuing for the rest of the year. This fact corroborated by the pipeline of upcoming IPOs. Growing adaption of technology along with the curiosity of new investors has led to many people asking us some fundamental questions.
So, in this issue of this article, we will cover some of the basics related to shares. They are listed on a stock exchange, fundamentals that govern the price movement, the dividend, bonus and rights issue, delisting of shares, and what it means for investors.
What is meant by the listing shares?
Equity shares are an essential part of an investor’s strategy for creating long-term wealth. It is essentially like owning a part of the company in proportion to the shares bought. However, before investors can buy or sell shares on the exchange, the company has to qualify and fulfil certain regulatory criteria and follow certain processes laid out by the Securities and Exchange Board of India (SEBI). After getting requisite permission, the company launches its IPO and on successful subscription, the shares are listed on the exchange on the given date. This entire exercise is known as ‘listing’ on the stock exchange after which shares can be traded publicly.
Why companies list on a stock exchange?
To an extent, a company can meet its fund requirements without getting listed on a stock exchange. However, when the company needs large funds for various business needs, tapping the public funds remains the option without increasing the debt burden.
Listing on a stock exchange enables the company to approach a wide section of society and realise its true value.
How are shares listed on a stock exchange?
The process of listing on the stock exchange is a fairly detailed and time-taking activity for any issuer company. Broadly, it includes the following activities or steps -
- The company decides that it needs to raise funds from the public.
- The company files an application with SEBI seeking approval for its public issue. The company needs to provide detailed information about its promoters, business operations, profitability, objectives of public issue etc.
- Numerous eligibility norms need to be fulfilled by the applicant company. Many disclosures are also required to be made the application by the company.
- SEBI evaluates the application and provides its approval for the public issue if it is satisfied.
- After SEBI’s approval, the company can actually approach the primary market and launch its IPO.
- Once IPO opens, an investor at large can submit their application for share (or bid) through their stockbroker or other authorized intermediaries.
- After the IPO closes, the investor receives the shares in his/her demat account and the blocked amount in the bank account will be debited.
- Post allotment of shares to applicants or bidders by company, trading of shares in the platform of stock exchange begins.
- Once the trading starts, anyone can buy or sell the shares through a stockbroker.
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How is a share price for IPO determined?
Nowadays, issuer companies decide a price band to submit a bid to purchase the given number of shares. This price band is decided by the company in consultation with merchant bankers taking into consideration many factors. It is important to note that while SEBI and exchanges (NSE / BSE) allows a company to come out with a public offer, they are not involved in price determined by the company.
After listing on the stock exchanges, share prices are largely determined by supply and demand factors of the market.
What causes the upward or downward movement of a share price?
At its core, stock prices follow the laws of supply and demand like in any marketplace. And given the dynamics of how interconnected our economy is, the prices fluctuate through the day based on what different people think and feel may happen to a specific company.
If more people have faith in a company’s performance and future, there will be an increase in demand which will drive up a share price. And if the outlook or sentiment around it is unfavourable, people would likely want to cut their losses and sell out. This would increase the supply of shares which would pull down the price. Some of the common factors affecting the demand are expected and unexpected company news, financial outlook, industry outlook, market sentiment, etc.
What is a price trend and why is it important to understand?
The price trend is the general direction in which a stock is moving. Apart from showing past performance, it is a window to the future and hence important for investors who want to purchase that share. Historical price trends also reveal patterns of highs and lows which are useful in gauging the timing for entry (buying at lows) and exits (selling at highs).
What are the price charts?
A picture, it is said, is worth a thousand words. This is quite true for price trends of shares, also known as price charts. Using a combination of data points such as date, price, and volume of shares traded, different types of price charts allow investors to look at the performance of a company to make trading decisions. And while technical analysis is a specialized field in itself, understanding the basics of analysis and the ability to read a few common types of price charts can vastly improve your investment strategy.
What are circuit breakers and how do they work?
The circuit breaker is a mechanism that is used by the stock exchanges to curb excessive volatility in markets. It is the maximum fluctuation allowed in share price after which trading gets suspended. The circuit limit gets fixed for individual stocks as well as indices. Known as the upper limit and lower limit, it is based on the closing prices of the previous trading day. Circuit breakers are set and governed by stock exchanges.
The purpose for circuit breakers is rooted in the fact that although indices and stock prices fluctuate constantly and react to several external factors. Any extreme movement may put retail investors at a huge risk. Circuit breakers ensure that any rise or fall does not continue indefinitely and speculation remains within an acceptable limit. This is a very important mechanism particularly for small investors who may get caught in the crossfire and incur massive losses.
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https://inquisitordev.blogspot.com/2021/06/basics-of-shares-listing-pricing-and.html
A Note of Caution While Investing in the Primary Market
New investors need to keep the following points in mind before investing in IPOs:
- Understand the business — Whether it is a new business model or a well-known business model and what are the drivers for the future growth in the company?
- Quality of the management — Who is running the show?
- Why are they raising money?
- Capital structure before and after the issuance
- Due diligence of the financial statements and the current valuation
With the introduction of the UPI payment option for participation in IPO, the whole subscription process has become a lot easier for retail investors. A retail investor must participate in good quality IPOs to create enough wealth for themselves. Remember some good issues are happening in the Small and Medium Enterprises (SME) segment also. So keep an eye on the forthcoming issues and invest according to your needs and goals.
Well I hope you have enjoyed this article don’t forget to share this article with your friends, let them also understand how to invest in Infrastructure shares in the most simplified way.
Disclaimer: We make all articles for educational purposes. We don’t give any buy/sell recommendations. Before investing in any stock do your own research and then invest in the long term.
Originally published at https://inquisitordev.blogspot.com on June 2, 2021.
