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Initial Public Offering

Initial public offering, also referred to simply as a "public offering," is the first sale of stock by a private company to the public.

IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

IPOs

IPOs can be a risky investment.

For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.

The IPO can be made by 3 methods which are:-

a) Public Issue through Prospectus – raising the capital by issuing a prospectus to inform and attract the investing public.

b) Offer for Sale – offering the new securities to the investing public by the intermediary like underwriters, merchant banking etc.

c) Private Placement – selling of new securities by an intermediary to selected clients at higher price.

When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order to raise extra capital at the same time.
The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors).

IPOs

An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth.
The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company.

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Shares represent ownership of a company. When an individual buys shares of a company, they become one of the owners of the company.

Shareholders choose who runs a company and are involved in making decisions, such as whether a business should be sold.

Shares

There are two types of shares which are normally issued:-

a. Equity shares and,

b. Preference shares

Equity shares are the most important source of raising long term capital by a company.

Equity shares represent the ownership of a company and capital raised by it is known as owner’s fund.

Equity shareholders do not get a fixed dividend but are paid on the basis of earnings by the company.

The preference shareholders enjoy a preferential position over equity shareholders.

As compared to the equity shareholders, the preferential shareholders have a preferential claim over dividend and repayment of capital.

Sensex

Preference shares are broadly classified as:-

a) Cumulative Preference Shares

b) Non-cumulative Preference shares

c) Participating Preference Shares

d) Non-participating Preference Shares

e) Convertible Preference Shares

f) Non-convertible Preference Shares

g) Redeemable Preference Shares

h) Irredeemable Preference Shares

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The secondary market is the market for the sale and purchase of previously issued securities. In the secondary market, securities are sold by and transferred from one investor or speculator to another.

It is therefore important that the secondary market be highly liquid (Originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly. This is how stock exchanges originated).

It derives its name from the fact that it is not the place of origin of the security, but the place where subsequent transactions of sale and purchase occur.

Securities in the market are not issued by the company directly to investors. Securities issued earlier are sold by an existing investor to another.

The company is not involved in the transaction at all. Any investor holding a security may choose to sell it. Likewise, any intending investor may wish to buy the security which had previously been issued by the company.

Kuwait Stock Exchange

However, the intending buyer cannot by the security from the company because it had already sold it out at the time of the public issue. The intending buyer and seller need not know each other.

Brokers in the stock exchange are needed to serve as intermediaries between them.Secondary market does not directly contribute to capital formation.
The company does not receive or pay any money but performs an important function.

They impart liquidity to investment and enhance the marketability of securities.

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Primary Market is the market for new long term capital. The primary is that part of the capital markets that deals with the issuance of new securities.

It is the market in which a security is sold for the first time and is therefore also referred to as the New Issue Market (NIM). In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new securities certificates to the investors. The process of selling new issues to investors is called underwriting.

Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy.

It is through this market that the savings of surplus units are channelled to the deficit units which utilize these funds for investment in buildings, plants, machinery, purchase of technology, etc.

Features of Primary Market are:-

1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM).

2. In a primary issue, the securities are issued by the company directly to investors.

3. The company receives the money and issue new security certificates to the investors.

4. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

5. The primary market performs the crucial function of facilitating capital formation in the economy

6. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’.

Methods of issuing securities in the Primary Market:-

1. Initial Public Offer;

2. Rights Issue (For existing Companies); and

3. Preferential Issue.

The capital market is the market for medium and long term funds. It refers to all the organizations, institutions and instruments that provide long term funds.

The organizations and institutions which constitute the capital market include the new issue market, the stock exchange, the mutual funds, insurance companies, investment banks.

The capital market mainly focuses on meeting long term financial needs of the business sector.

Global Market In Hand

The business enterprise utilizes this market to procure finances for long term investments, such as buying plant ,machinery ,buildings, etc. funds in the capital market are raised by issuing a wide variety of securities which includes :-

• Equity shares or ownership securities
• Debentures or creditor ship securities
• Preference shares or securities having preferential claims
• Other innovative securities which are variant s securities, with new features added to provide a wider choice to investors.

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Financial market is a crucial link in the saving investment process.They serve to transfer money capital or financial resources from savers to entrepreneurial borrowers. ’

Financial markets bring together borrowers and lenders, making available funds to those willing to pay for their use ’. Financial markets consists of two major segments

1. Capital Market - the market for medium and long term funds
2. Money Market - the market for short term funds…

Financial markets facilitate:

The raising of capital (in the capital markets);
The transfer of risk (in the derivatives markets); and
International trade (in the currency markets).

They are used to match those who want capital to those who have it.