Name: Mansi Kataria (2006 – 2008)
Title: Initial Public Offer (IPO)
Summary
This present study tries to find out the types of information which are important for assessing an IPO by small investors. This presents study also evaluates the effectiveness of the methods, strategies, and tools available to small investors to process the information for assessment of the IPO.
Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks.
So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that one can work with, but quite another to determine which numbers are relevant.
A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how does one measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation, and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.
- Most Small investors don't go for thorough study of the market before IPO investment.
- Most Small investors are dependent on expert help before IPO investment.
- Overwhelming majority believes that market sentiment and specific industry analysis is very important.
- Majority believe that one can gain from research on IPO.
- A significant percentage of investors are prepared to learn basic analytical tools of IPO analysis.
Conclusion
- An IPO is the first sale of stock by a company to the public.
- Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.
- Going public raises cash and provides many benefits for a company.
- The dot-com boom lowered the bar for companies to do an IPO. Many startups went public without any profits and little more than a business plan.
- Getting in on a hot IPO is very difficult, if not impossible.
- The process of underwriting involves raising money from investors by issuing new securities.
- Companies hire investment banks to underwrite an IPO.
- The road to an IPO consists mainly of putting together the formal documents for the SEBI and selling the issue to institutional clients.
- The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.
An IPO company is difficult to analyze since there isn't a lot of historical info.
- Most of the strategies discussed in this report use the tools and techniques of fundamental analysis, whose main objective is to find the worth of a company, or its intrinsic value.
- In quantitative analysis, a company is worth the sum of its discounted cash flows. In other words, it is worth all of its future profits added together.
- Some qualitative factors affecting the value of a company are its management, business model, industry, and brand name.
- Value investors, concerned with the present, look for stocks selling at a price that is lower than the estimated worth of the company, as reflected by its fundamentals.
- Growth investors are concerned with the future, buying companies that may be trading higher than their intrinsic worth but show the potential to grow and one day exceed their current valuations.
- Income investors, seeking a steady stream of income from their stocks, look for solid companies that pay a high but sustainable dividend yield.
- Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average (DJIA) that have the highest dividend yield.
- Technical analysis, the polar opposite of fundamental analysis, is not concerned with a stock's intrinsic value, but instead looks at past market activity to determine future price movements.
Many individual investors make the mistake of focusing on stocks and the stock market at the expense of focusing on the underlying companies. But many people continue to ignore Mr. Buffet’s most important lesson: first analyze the business. The individual small investor plays a dangerous game when he or she tries to divine whether a stock is going to go up or down next quarter. It’s tough to do well, and even tougher to do consistently.
Expert opinion is the market offers no magic bullet or money machine. If one is a buyer, the best one can do is find a good company with strong fundamental prospects that is currently undervalued or otherwise under-recognized (or maybe temporarily beaten down because of an overreaction). This brings up an important point – there are many good companies, but not all are good investments. Small investors should be looking for
1) Good companies at 2) the right price.
A good company can be too expensive; and a bad company is never cheap enough.
Even if one bought a good company that has good potential, one may still have answered uncertainty in hands. The market has an ability to paint entire sectors with the same brush. These prolonged “sector judgments” can be very costly to small investors if he doesn’t account for them.
The market loves to render companies “guilty by association”. Large numbers of research have clearly established that sector or industry dynamics have a greater impact on stock price than company performance. Some reports go so far as to suggest that selecting individual companies is barely important. In most cases, one is buying into a sector first and a company second.
Risk and return are really important, but small investors’ most important question might actually be this: How long is he investing for? His time horizon will determine his style in a big way. Day traders have very short horizons - they don’t use fundamental analysis (nor do they need to). Many individual investors, whether or not they admit it, get caught up in gaming the next quarter’s earning surprise, and are therefore investing for about three months.
Investing for the next quarterly result is a playable game, but one should understand that he is competing against people who do it full time. A small investor might be smarter, but he is trying to beat professionals who spend their whole week on a handful of stocks.
Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks!
This doesn't mean that one can't expand his wealth through the stock market. It's just better to think of stock picking as an art rather than a science. There are a few reasons for this:
So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that one can work with, but quite another to determine which numbers are relevant.
A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how does one measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation, and so on.. This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.
Because of the human (often irrational) element inherent in the forces that move the stock market, stocks do not always do what one anticipate they'll do. Emotions can change quickly and unpredictably. And unfortunately, when confidence turns into fear, the stock market can be a dangerous place. Experts say that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory--a "best guess" of how to invest. And sometimes two seemingly opposed theories can be successful at the same time. Perhaps just as important as considering theory, is determining how well an investment strategy fits investor’s personal outlook, time frame, risk tolerance, and the amount of time he wants to devote to investing and picking stocks.
Recommendations
Though the move to make IPO assessment mandatory has drawn some critical comments, the need for a tool to help investors make better-informed decisions and judge the quality of issues hitting the market is undisputed.
An IPO assessment brings four major pluses. Firstly, it improves information content through a professional and independent assessment.
Secondly, it is relief for individual investors from information overload. Thirdly, it provides disincentives for weak companies to come to the market in the hope of raising easy capital. And fourthly, it brings about greater level of investor sophistication.
Professional and independent assessment
The public issue report, which is part of the IPO assessment will provide focused company information to investors and will create awareness about the fundamental strengths and weaknesses of the company.
Dissemination of fundamental information will help investors allocate resource better. The report will be a key input in the investment decision, in a manner similar to what a credit rating is for a debt investor.
Relief from information overload
In a situation where issues are bunched in the pursuit of optimum market timing and disclosures are voluminous and complex, a service that analyses and interprets these disclosures independently, quickly and in manner that facilitates a comparative study will be extremely useful in cutting through the clutter. The usefulness would be particularly high for small investors as it will serve as a guide on the strengths of the company coming out with the issue.
Disincentives for weak companies
Given the improved quality of information content in the marketplace after the introduction of IPO assessments, there will be a stratification of the market on fundamental lines. Fundamentally sound companies will command commensurate valuations, while companies whose fundamentals are not very strong will be impeded in building up speculative demand among investors, and will need to offer pricing, which will adequately compensate investors for the risks they take.
Increased investor sophistication
In today's markets, with free pricing, it is just as easy to lose money on listing as it is to make it. An independent and informed opinion on the fundamental quality of the company, along with clear and concise information, will go a long way towards making the process far more scientific. With a clear view on the quality and risk drivers of the company the investor is getting into, he can choose the level of risk he is comfortable with. He will then take investment decisions, which reflect his outlook on factors such as product prices and input costs and are in line with his target portfolio composition. Such analysis is today beyond all but the most sophisticated investors.
The assessment is not a recommendation to buy - or not buy - a stock. It is, instead, a powerful tool to assist the investor in making up his mind about the quality of a company offered as an IPO investment option.
Need for rating
The need to rate equity offerings emerges from the fact that majority of retail investors do not read the offer document and even where they do they may not fully comprehend the implications of all the disclosures made in the document. Ratings from independent agencies are aimed at helping investors separate good floats from risky ones.
The above article is a summary extract from the dissertation projects of the MBA and BBA students of Skyline College. Skyline, situated in Delhi and Gurgaon (NCR) is a premier institute providing management education specialising in MBA and BBA degrees and specialist courses for travel and tourism as well as mass communication.
