IPO - Initial Public Offering

What is an IPO?

IPO stands for Initial Public Offering. When private companies invite the general public to subscribe to their shares, this issue of shares is called an Initial Public Offering (IPO). This means the company is no longer privately owned, but is owned by a variety of investors, some of whom are not involved with the day-to-day operations of the company -- these investors simply own some of the company's stock, which they purchased on the open market. Although IPOs can vary greatly from one company to another, and they require a long, expensive and complicated process, the IPO is basically a way for the company to make money based on expectations of future success and profit.

Types of IPO

Book Building and Fixed Price Issue are the two types of Initial Public Offerings (IPOs) through which a corporate can raise money in the capital market.

In a book building public issue the bids are received at different price levels and the demand for the issue is built up over a period of time. Depending upon the bids received at different price levels the issue price is ascertained. In a fixed price issue the issue price is pre ascertained by the issuer. In case of a fixed price issue the issue price is fixed.

Why do Company go for IPO?

The main purpose of an IPO is to raise capital for the corporation." Other than raising capital, the reasons may be:

1. Liquidation of the shares of the company so that the founders and the rest of the existing shareholders will be able to "cash out" and trade their shares for cash or other traded stocks (referred to as "exit event").

2. Expansion of the company into new territories or markets may require the company to become public, not only by means of more funding, but also by regulatory or marketing reasons. Being public is associated with credibility and accountability.

3. Expansion of the company either by acquisition or merger. Getting more money into the company allows the company to have more money to finance takeovers or mergers with other companies. Moreover, being public will allow the company to merge with private companies who want to become public without going through IPO (referred to as "reverse merger").

4. Levergaing future sales or business to create extra value for the company. In some cases, it is possible for a company to gain more money by pushing up the price of its traded shares more than by actual sales or business events. In the "happy dot com days" companies would buy other companies just because it created a good hype to their stock, eventhough the acquired company was closed shortly after that.

Issue Related Terms & FAQs?

Price Band: Price band indicates the different price levels within a given range in which the investor can enter his bid.

Floor Price: It is the lower end of the price band.

Cap Price: It is the upper end of the price band.

Offer Document: offer document means prospectus in case of a public issue, which is file with Registrar of companies (ROC) and stock exchanges. The offer document contains all relevant details pertaining to the issue upon which the investors can make his/her decision.

Draft Offer Document: means the offer document in the draft stage, which is filed with SEBI for its observations. The draft offer documents are filed with SEBI at least 21 days prior to filing the offer document with ROC and Exchange.

SEBI ROLE: Any company making a public issue or a listed company making a rights issue of value more then Rs 50 Lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after receiving observations from SEBI. The validity of SEBI observation is 3 months only i.e the company has to open its issue within 3 months period.

Cut off Price: In case of public issues the actual discovered price/ issue price can be anything between a given price band. The discovered issue price is called the cut off price.

Basis of Allotment: The allotment in case of QIB category is on a discretionary basis while in case of Retail and Non-QIB(HNI) category the allotment is on a proportionate basis.

BSE-NSE List of Holidays

The Exchange will observe the following days as Trading Holidays during the Calendar Year January to December, 2008.

6th March 2008 - Mahashivratri

20th March 2008 - Id-E-Milad

21st March 2008 - Good Friday / Holi (1 st Day)

14th April 2008 - Ambedkar Jayanti

18th April 2008 - Mahavir Jayanti

1st May 2008 - Maharashtra Day

19th May 2008 - Buddha Purnima

15th August 2008 - Independence Day

3rd September 2008 - Ganesh Chathurthi

2nd October 2008 - Ramzan Id / Gandhi Jayanti

9th October 2008 - Dasera

28th October 2008 - Diwali (Laxmi Pujan)

30th October 2008 - Diwali ( Bhaubeez)

13th November 2008 - Gurunanak Jayanti

9th December 2008 - Bakri-Id

25th December 2008 - Christmas

Types of Trading

Trading Styles

Difference of behavior, mindset and mental attitude led the human towards diversification even in the same field. In Forex Trading, this rule did validate itself and resulted in different types of trading styles. Some of the well-known common trading styles are:


Day Trading

This trading style refers to opening and closing positions within the same day. The markets do not fluctuate much over the course of a given day relative to their movements over longer periods of time. Therefore, day traders will look to use as much leverage as possible to magnify their exposure to those market moves that they can find. Most day traders treat market speculation as their full- or part-time job. They see trading through the lens of a daily employment regiment, punching in at the beginning of the day and closing out any positions at the end.

It is worth noting however that day trading, being a fast moving, highly challenging trading style may not be for everyone. Should decide that day trading is for you, then there are also many different styles and variations of day trading with the currency market that you may wish to sample before choosing the form that feels right for you, or maybe you will prefer to utilize a series of styles.


Position trading

Trader who, take a long-term, buy and hold approach. Run their trades for number of days even weeks and more. A position trader can be compared to a squatter who sets up a tent in the middle of a crowded shopping mall, letting people pass by and stare but remaining relatively untouched by them until the authorities come in to shoo him off.

Since position trading involves staying in one position for more than a day, unfavorable market conditions rarely phase traders who use this trading strategy, unless they continue for more than a couple of days. Of course there are risks involved with staying in one position for so long, but the risks are less than those experienced by day-traders, who have to enter and leave the market many times in a day, leaving too much opportunity for mistakes. One disadvantage to position trading is that any changes that occur overnight or after hours can result in a serious financial loss. However, because of the constant fluctuation in currency values, the same magnitude of value change can occur in the other direction as well, allowing the trader to realize a higher profit during hours when most day-traders are asleep.


Scalping

Scalping involves making dozens or hundreds of trades a day, trying to scalp a small profit from each trade by exploiting the bid-ask spread. Scalping works because not all stocks remain on the move at all times. Scalpers generate profits from these non-moving stocks or turn around and sell for a profit those stocks that fluctuate in the positive direction. This way, they receive a small profit. This profit quickly adds up. It takes lot of stamina for performing numbers of trades. Normally 1-minute chart is used for Scalping.



Swing trading

Traders who can react quickly to market changes, including at-home and day traders, benefit from swing trading, which is a trade strategy that involves holding a position for longer than a day. If a trade seems to be going sour, swing traders can exit the market before losing too much money. Swing traders usually maintain a position for 3-10 days, taking advantage of any positive swings in the market. They flow with the market, taking little trades here and there. Most swing traders have an interest in the trends of stocks rather than fundamental values, although it has often been said that swing trading is a variety of fundamental trading. In fact, swing trading sits squarely in the middle between day trading and trend trading in terms of the length of time invested in a position. These traders stick around just long enough to see how the wind will blow before deciding to stay and see a trend through or go on to more profitable pastures.


Mechanical trading

Mechanical trading system is often touted as the end-all to Forex trading. Traders choose a system to follow and enter it into a program that will then pick starting and stopping points for trades as well as maintain a position, without requiring a trader be present to control those actions.

Implementing a mechanical trading system can be the best decision a Forex trader can make. However, it can also be hard for those traders who work off of emotion. The idea of putting future profits into the hands of a computer program can be a scary situation, however, with free platforms available now, it is a limited-loss system: a computer program won't ride a trend just to see it plummet in the end, and a program can't get cold feet and sell too early.

As an automated system, a mechanical trading system is a good all-around program to keep in the background. Whether a trader wants to implement a break-out system, reversal, indicator or trend-following system, there are plenty of options available.


Discretionary trading

Discretionary traders rely on their intuition to decide when to enter or exit a market. While other trading methods emphasize the reading of signals based on formulae or patterns, discretionary trading involves using subjective experiences. They are the polar opposite of the mechanical trader.

Because discretionary trading is based on intuitive reaction, it is best suited to those traders who feel comfortable relying on their gut-feelings to tell them when to buy or sell. Many traders can make large profits by jumping on profitable position changes quickly. But there are also disadvantages to using this kind of trading system. Discretionary traders may end up making a great profit with their trades, but without using a formal system, there is no way to backtrack to find out how they succeeded, so there's no way to repeat the process.

Even without having a fool-proof system, discretionary trading can be very profitable, while at the same time offering traders the flexibility and control to jump in and stop a trade that appears to be going downhill or modifying a bid to maximize profit if it appears that a trade value is increasing.

Basics Stock Market terms

Ever come across words like Sensex, Nifty, correction, rally et al?

Well, a regular reader of business newspapers must have come across these and a host of other terms and terminology that describe the stock market activities.

Let us go through a few of these terms used in routine stock market parlance. This will help you understand the stock market.

Sensex

It is an index that represents the direction of the companies that are traded on the Bombay Stock Exchange, BSE. The word Sensex comes from sensitive index.

The Sensex captures the increase or decrease in prices of stocks of companies that it comprises. A number represents this movement. Currently, all the 30 stocks that make up the Sensex have reached a value of 14,355 points.

These companies represent the myriad sectors of the Indian economy. A few of these companies and the sector they represent are: ACC (cement), Bajaj Auto, Tata Motors, Maruti (automobile), Infosys, Wipro, TCS (information technology), ONGC, Reliance (oil & gas), ITC, HLL (fast moving consumer goods) etc.

The increase or decrease in this index, the Sensex, is the effect of a corresponding increase or decrease in the stock market price of these 30 companies.

Nifty

It is the Sensex's counterpart on the National Stock Exchnage, NSE.

The only difference between the two indices (the Sensex and Nifty) is that the Nifty comprises of 50 companies and hence is more broad-based than the Sensex.

Having said that one must remember that the Sensex is the benchmark that represents Indian equity markets globally.

The Nifty 50 or the S&P CNX Nifty as the index is officially called has all the 30 Sensex stocks.

The NSE Nifty functions exactly like (explained above) the BSE Sensex.

Bull

A particular kind of investor who purchases shares in the expectation that the market price of that company's share will increase. S/he sells her/his stock at a higher price and pockets the profit. Simply put, the bulls buy at a lower price and sell at a higher price. For instance, if a bull buys a company's share at Rs 100, s/he would prefer selling the same stock at Rs 120 or any price higher than Rs 100 to make a profit.

Usually, a bull buys first at a lower price and sells later at a price higher than her/his cost of purchase. Bulls are happy when the markets (the Sensex and Nifty) move upwards. A falling market takes bulls into hibernation.

Bear

Bull's counterpart is the bear. A bear sells stocks first that s/he owns or borrows from, say a friend, and then purchases the same quantity of shares at a lower price.

If a bear sells first, say 100 shares of Ranbaxy at Rs 400, and later purchases the same number of shares at Rs 375, then her/his profit is Rs 25 (400-375) per share. This way s/he has got back the 100 shares of Ranbaxy and simultaneously made a profit of Rs 2500. The shares can later be returned to the bear's friend if s/he had borrowed the same from a friend.

There are bears in the market that sell shares first without actually owning them unlike in the above example. Such selling is called naked short selling or going short on a stock.

Bears are happy in a falling market.

While individual investors can engage in selling first and buying later (also referred to as short selling), mutual funds and foreign institutional investors are not allowed this luxury in India yet.

Squaring off

A process whereby investors/traders buy or sell shares and later reverse their trade to complete a transaction is called squaring off of a trade.

Indian equity markets remain open between 9:55 am and 3:30 pm normally (At times there are sun outages when satellites fail to link with ground infrastructure of the two exchanges (the servers where buy and sell orders are matched). During these times the trading period is extended till 4:15 pm to compensate for the time lost in between).

If you purchase 50 shares of say Infosys and sell them later before the market closes then you have squared off your buy position.

Similarly, if you sell 100 shares of Maruti and purchase them later then you have squared off your sell position.

Equity market rules in Indian allow investors/traders to engage in day trading. Day trading is a mechanism whereby investors/traders can buy, say 100 shares of a company as soon as the BSE, NSE opens (the working hours are 9:55 am to 3:30 pm in normal times) and sell the same amount of shares later (bulls) before the two stock exchanges close. However, a stock bought on the BSE cannot be sold on the NSE and vice-versa.

Similarly investors/traders can also sell first and buy later (bears) during the course of the day to square off their sell positions.

Rally

The word suggests the gain made by the Sensex or Nifty during the course of the day. If such gains are made on a regular basis then market participants like investors, brokers etc call it as a market rally.

If the Sensex moves from 14,000 points to 15,000 points in a span of say 14 or for that matter 20 trading sessions (the stock markets remain closed on Saturdays, Sundays and other bank holidays) then the phenomenon is referred to as a rally.

Bulls are always said to be active during a market rally.

Crash

As the word suggests, crash refers to a fall in the value of Sensex and Nifty. In the first three trading days of this week(February 12-14) alone the Sensex had crashed by more than 700 points.

The Sensex then had plummeted from around 14,700 levels to around 14,000 points. This sudden and violent 700-point fall is referred to as th crash or market crash.

Bears are said to be active and happy during the market crash as their style of trading (sell first and buy later) helps them make good money during a crash.

Bonus shares

These are the free shares that a listed company gives its shareholders. A bonus is declared after a discussion amongst the board members that make up the management of a company.

A bonus issue is looked upon as a way of rewarding shareholders. For instance, let us take a company A that has made a profit of Rs 100 crore in the financial year 2007 (April 1, 2006 to March 31, 2007). Out of this amount the company may need Rs 50 crore for say buying machinery or constructing a new warehouse. And the remaining Rs 50 crore the company puts into its reserve pool or idle cash that the company has no plans to spend. It can then issue bonus shares out of these Rs 50 crore.

When a company declares a bonus issue it converts this idle cash into shares that are then distributed amongst its shareholders. This process is called capitalising of reserves. A bonus is usually declared as a ratio. A bonus issue in the ratio of 1:1 means you will get one free share for every one share of the company you own.

A 2:1 bonus issue (or two for every one held) means you will get two free shares of a company for every one that you own. Similarly, a 5:1 bonus issue will give you five free shares for every one share that you own.

Dividend

It is again a way of rewarding a company's shareholders. A dividend is generally issued as a percentage of the face value of a share. Face value is the nominal price of a company's share.

A share can have different face values like Re 1, Rs 2, Rs 5, Rs 10 or Rs 100. An 80% dividend on a share of face value Rs 2 (Rs 1.6) will always be less than a dividend of 20% declared on share of face value Rs 10 (Rs 4).

Like bonus shares, dividend amount also comes from a company's free cash reserves.

Book closure date

This is the date on which a company closes its books for business after it announces a bonus or dividend. The company's registrar keeps a track of who owns how many shares of that particular company.

Any investor having shares in his/her demat account before this date becomes eligible for the bonus issue or the dividend declared.

Say a company A announces a 1:1 bonus issue and the book closure date is February 28, 2007. If you don't own this company's share and want to avail of the bonus offer then you must not only buy this share before February 28 but also make sure that the number of shares purchased by you are transferred to your account from the seller before this date.

If the ownership of shares is reflected in your account after February 28 then you will not get any bonus shares. The same is also true for dividend announcements.

Source: rediff.com

Trading basics for the beginners

How does stock trading work?
The Share market immediately conjures up stories of fortunes made and lost. A share makes the holder a partial owner of the company and different types of shares have different rights associated with them. If you are able to sell off your share at a price higher than your buying price, you make a profit but you also run the risk of incurring a loss if the share price falls. The business you invested in makes profit and they provide you part of it as dividend. In the share market you are an anonymous player and many have made a reasonable profit. There is no unique formula to ensure consistent gain but before you venture into this market you should know the basics of stock trading.

What does trading stocks mean?

Buying and selling of stocks is referred to as trading in the financial market. You have to approach a broker in order to trade. You can trade either electronically or on the exchange floor. Exchange floor scene must be familiar to you; the NYSE has been on television as part of news coverage innumerable times. It is here that your broker arranges for your shares to be ordered. The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized.

Electronic transaction is very common today. It is an efficient and fast method of stock trading. Here too you require a broker but you receive confirmations almost immediately .In online investing your broker will connect to the exchange network and search for a buyer or seller according to your order.

How are the stock prices determined?

The stock prices cannot be predicted, they depend on various factors like political unrest, if there is a huge demand for a particular share at a given time, prices can fluctuate, any event that could adversely affect the company will also cause the share prices to drop. Before you decide on which stock to buy you must answer the following questions.

Do you know the company well enough?
What is the company’s reputation in the market?
Have you gone through their annual report?
Do you have the confidence to invest in this company?
Is some negative news about the company circulating?
How are analysts predicting the future?
How is the management of the company?
What are their growth prospects?
Am I aware of the insider activity?
Is it an internationally renowned company?
How is their marketing strategy?
Have there been any changes in the management recently?
How consistent has been their performance?
Has there been a sudden shift in their production?

Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves a lot of risk , risk taking could either lead to fortunate gains or to bankruptcy.
• You should avoid investing money more than you can actually afford.
• Know about your investment well and do not blindly depend upon your broker.
• Follow regular stock market quotes to keep yourself abreast of the market swings.

The share provides you with an earning power, gives you partial ownership of a company and the freedom to buy or sell at any moment. But if you are a novice in stock trading you need to play safe and equip yourself with a lot of information. Unless you are a seasoned player you should invest only after surveying all the alternatives and never go beyond your risk tolerance. Know where to draw the line and begin trading in stocks!

How does the stock market work?

We have all heard the amazing stories about people making it big on the stock market. The tales are almost like the adult version of fairy tales; someone taking a small amount of money and making something truly amazing so that they never need to worry about money again.
We see example of the stock market heroes; people like Warren Buffet who know how to work the stock market in their favor. These kind of people always inspire me in a way. They fill me with some sort of desire to try my hand in the stock market and see if I can make some quick cash.

Before you start investing in the stock market it is a good idea to ask yourself, “How does the stock market work?” The answer to this question is simple. Companies go public by offering a specific number of shares in their company to the public through the stock exchange. Investors then can use the stock exchange to buy and sell stocks of companies that they are interested in. While this basic description of how the stock market works is adequate enough to understand what the stock market is, to get a better understanding of how it actually works it will be important to learn about some of the terms that are commonly used when discussing the stock exchange including stock prices and market capitalization.

The first term that you may hear when you start learning about how the stock market works is stock prices. Stock prices are the price that a specific stock sells for. This price is set by several market factors including the health of the economy, trading trends, spending trends, and financial or technical reports put out by a company or an independent third party. The next term that you may hear about is market capitalization. Market capitalization is the value of the company or the stock that is being offered. To calculate the market capitalization of a company, or stock, simply use this formula: The number of outstanding shares X the price of the stock = market capitalization of the company.

After you learn about the basics features of the stock exchange you will next need to learn how to buy and sell shares. To buy a stock you will need to establish some kind of investment account. In most cases you will open an investment account with a stock broker that works at a local firm. However, today you can also open an online investment account and make trades without the help of a stock broker. After you have set up your account you will need to fund it before you can make a purchase. Once your account is funded you will be able to enter your order for a stock purchase. When you are ready to sell your shares you will either tell your stock broker that you want to sell X number of shares of Company A, or you will need to enter a sell order via your online investment account.

Want to become a successful day trader?

A lot of people will tell you day trading is really risky and not to do it. The problem with that is they are confusing "risk" with "time." Day trading is no more or less risky than any other kind of trading. The difference is that you will either make your money quicker, or lose your money quicker. The end result is the same. So if you want to day trade, go for it.

Here's the progression you need to follow:

1. Start out by learning the "50% retracement rule." The idea to take away from this, is that many major financial market moves are followed by substantial retracements. "50" is not particularly the magic number, it just means to be on the watch for large retracements in price.
This is the single most effective and reliable way to trade for a beginner. Other people will tell you about technical indicators, but trading these indicators is actually much LESS reliable in the long run.

2. Pay very little attention to news or tips. Other people will tell you that you should pay attention to a company's balance sheet, P/E, company news, etc. The reality is that these things have very LITTLE to do with stock price in the intermediate horizon (1-2 years), and have absolutely nothing to do with day to day price action. If you don't believe me ... you'll find out.

3. The best way to day trade is to trade leveraged products. This means things like currencies or commodity futures. Leverage is a double-edged sword. It can help you. It can hurt you.

4. The best way to day trade is with a company that offers low commissions and fees and real time quotes. They must be a member of the NFA (National Futures ASsociation), SIPC, and FINRA. These are regulatory agencies that make sure they won't steal your money.

5. Companies that offer futures and currency trading usually offer FREE demo accounts with which to practice. Take advantage of this.

6. As a trader, my concern is not to predict market behavior. My concern is to define expectations for risk and profit.

7. As a day trader, your trading plan must define your risk and profit objectives for each trade you enter. You must not stray outside of these parameters. You must not tie yourself into thinking that you can "predict" market behavior. Instead, you must identify the criteria under which you expect to make money and the method with which to control your risk.

8. As a beginning trader, you will do this by using "stop losses" to cut your losses once they progress outside your risk parameter. You may also take hedging positions in next month futures contracts. You may purchase/sell options. Anything to control your downside.

9. Trading is a probability game. You will take losses. You will make profits. Your trading plan must have a "reasonable" expectation of producing more profits than losses in the *long term.* Your plan should be based on the close observation and classification of the price behavior of financial instruments and their derivatives.

Those steps will get you started with the best chance of success.

If you are highly mathematical (ie. graduate level type of math), you may want to give consideration to the study of statistics as it is applied to finance. Your understanding of the advantages and shortcomings of financial derivatives (such as options) will be greatly improved.