IPO, abbreviated as Initial Public Offering, takes place when a private company issues shares publicly for the first time in the stock market. Once the company declares an IPO, the stocks no longer remain private and are collectively owned by all shareholders.
The private company enters into IPO with two primary reasons:
1) To raise funds for expansion
2) To recover from losses or debts
Generally, shareholders value those IPO’s that have a strong company’s profile and market capitalization. Potential shareholders carefully examine both these factors and make their decision.
To make effective decisions in an IPO, investors go through data regarding all financials of the company, its assets, liabilities, revenue generation, performance and several factors.
These data are analyzed before going for a final audit. Based on this audit, a prospectus is being made and filed with the registered stock exchange.
Later on, an offering date is scheduled, and the price of the IPO is determined by shareholders.
Here are several major factors that affect the price of the shares offered in an IPO:
Not every investor performs a detailed analysis before applying for the IPO but investing in an IPO based on a false approach or fake news is not the correct approach.
Instead, they should study in-depth about a particular company, its fundamentals, history, trends, past performance and especially financial statements before stepping into an IPO.
Several methods are involved in the IPO valuation process, which requires a deeper understanding and especially a lot of experience.
Security Exchange Board of India (SEBI) carefully studies and examines every IPO application to ensure that money invested by the general public is going into safer hands and at an appropriate value.
The different valuation methods of an IPO involved in defining share value are:
In relative valuation, the company’s share value is measured by considering the value of similar companies.
In this IPO valuation method, the experts carefully examine the closer benchmarks in their industry and the companies already listed on the stock exchanges.
The absolute valuation method is used in measuring the strength and financial status of a particular company. This IPO valuation method uses Discounted Cash Flow (DCF) in assessing the wealth of the company.
However, the absolute valuation is different from relative valuation because absolute valuation studies the company’s wealth using the time value of money and collection of interest.
Whereas in relative valuation, it measures a company’s wealth by comparing it to its competitor’s wealth.
Several experts sit together in a discounted cash-based valuation method and analyze expected cash flows, future performance, investment, potential revenue sources, and more.
This method takes a lot of hard work and understanding because the analysis are made on the business performance, and it must have a proper justification.
Economic valuation is entirely a mathematical valuation where a set of parameters are taken into consideration. These parameters consist of businesses residual income, debts to be paid off, assets value owned and liabilities to get away, risk-bearing potentials and so on.
This IPI valuation compare’s a company’s market capitalization to its annual income. To carry out the company’s exact value, the actual value is calculated by its net income to determine the price-to-earnings multiple.
However, this method is mostly employed when the company has positive and other important business belongings to the same industry and has the same growth and capital structure lines.
IPO, abbreviated as Initial Public Offering, takes place when a private company issues shares publicly for the first time in the stock market.
Once the company declares an IPO, the stocks no longer remain private and are collectively owned by all shareholders.
Economic valuation is entirely a mathematical valuation where a set of parameters are taken into consideration. These parameters consist of businesses residual income, debts to be paid off, assets value owned and liabilities to get away, risk-bearing potentials and so on.
Here are several major factors that affect the price of the shares offered in an IPO:
1) Company’s financial performance over past few years
2) Share market trends
3) Number of stocks issued in an IPO by a particular company
However, the absolute valuation is different from relative valuation because absolute valuation studies the company’s wealth using the time value of money and collection of interest.
Whereas in relative valuation, it measures a company’s wealth by comparing it to its competitor’s wealth.
Security Exchange Board of India (SEBI) carefully studies and examines every IPO application to ensure that money invested by the general public is going into safer hands and at an appropriate value.
Final Thoughts
When deciding which IPO is better to invest in, it’s all about deciding upon its valuation rather than the share price.
Once the share price is listed on the stock exchange, it is affected due to multiple factors like general market sentiment, economic conditions, natural calamities, and more.
Thus investors have to carefully study the past performance, financial statement, history, trends, fundamentals and several major parameters before stepping into an IPO.