NSE-20 Share Index
Close: 4,390.46
+3.77 + 0.09%
Wow! a company is going public ! what should an investor know before deciding whether or not to subscribe to a new company which has been approved by the capital market authority to list and sell their shares through an IPO at the Nairobi Stock Exchange.
What is an IPO
Initial public offering (IPO) - the first time a company sells stock to the public. An IPO is a type of a primary offering, which occurs whenever a company sells new stock, and differs from a secondary offering, which is the public sale of previously issued securities, usually held by insiders. Some people say IPO stands for "Immediate Profit Opportunities." More cynical observers say it stands for "It's Probably Overpriced."The KENGEN IPO brought a lot of joy to many Kenyans who bought the Stock. However, it is important to note that not all IPO's will perform as KENGEN did in the market. In all IPO's there are potential for big returns, however, investing in IPOs is risky business. If you are interested in jumping into any new issue ( IPO) you should know that is that around the world, IPOs have historically underperformed the broader market. KenyaShares encourages investors to get beyond the allure and hype of IPOs and become educated about the facts of investing...
Common Terms used in the IPO market.
Lead underwriter - the investment bank in charge of setting the offering price of an IPO and allocating shares to other members of the syndicate. Also called lead manager.
Oversubscribed - defines a deal in which investors apply for more shares than are available. Usually a sign that an IPO is a hot deal and will open at a substantial premium. Lock-up period - the time period after an IPO when insiders at the newly public company are restricted by the lead underwriter from selling their shares. Usually lasts 180 days.
New issue - same as an IPO.
Offering price - The price investors' allocated shares in an IPO must pay. Not the same as the opening price, which is the first trade price of a new stock.
Opening price - The price at which a new stock starts trading.. Also called the first trade price. Underwriters hope that the opening price is above the offering price, giving investors in the IPO a premium.
Penalty bid - a fee charged to brokers by the lead underwriter for having to take back shares already sold. Meant to discourage flipping. Aftermarket performance - used to describe how the stock of a newly public company has performed with the offering price as the typical benchmark.
All or none - An offering which can be canceled by the lead underwriter if it is not completely subscribed. Most best effort deals are all or none.
Best effort - a deal in which underwriters only agree to do their best to sell shares to the public. As opposed to much more common bought, or firm commitment, deals.
Book - a list of all buy and sell orders put together by the lead underwriters.
Bought deal - an offering in which the lead underwriter buys all the shares from a company and becomes financially responsible for selling them. Also called firm commitment.
Break issue - term used to describe when an newly issued stock falls below its offering price.
Completion - an IPO is not a done deal until it has been completed and all trades have been declared official. Usually happens about five days after a stock starts trading. Until completion, an IPO can be canceled with all money returned to investors.
Conditional offer - gathered by a lead underwriter from its investor clients before an IPO is priced to gauge demand for the deal. Used to determine offering price.
Direct Public Offering (DPO) - an offering in which a company sells its shares directly to the public without the help of underwriters. Can be done over the Internet. Liquidity, or the ability to sell shares, in a DPO is usually extremely limited.
Flipping - when an investor buys an IPO at the offering price and then sells the stock soon after it starts trading on the open market. Greatly discouraged by underwriters, especially if done by individual investors.
Greenshoe - part of the underwriting agreement which allows the underwriters to buy more shares—typically 15 percent—of an IPO. Usually done if a deal is extremely popular or was overbooked by the underwriters. Also called the overallotment option.
Gross spread - the difference between an IPO's offering price and the price the members of the syndicate pay for the shares. Usually represents a discount of 7 percent to 8 percent, about half of which goes to the broker who sells the shares. Also called the underwriting discount.
Premium - the difference between the offering price and opening price. Also called an IPO's pop.
Prospectus - the document, which explains all aspects of a company's business, including financial results, growth strategy and risk factors. The preliminary prospectus is also called a Red Herring.
Selling stockholders - Investors in a company who sell part or all of their stake as part of that company's IPO. Usually considered a bad sign if a large portion of shares offered in an IPO comes from selling stockholders.
Syndicate - a group of investment banks that buy shares in an IPO to sell to the public. Headed by the lead manager and disbanded as soon as IPO is completed.
Venture capital - the pre-IPO process of raising money for companies. Done only by accredited investors.
© 2006 KENYASHARESTM. KENYASHARESTM is a registered trademark of KENYASHARESTM, LLC. All information provided herein is for informational purposes only and is not intended to be considered financial or investment advice provided by KENYASHARES or any of its agents. By participating on this site, you specifically understand and agree that KENYASHARES does not provide financial or investment advice. You further understand and agree that financial and investment transactions carry a certain amount of risk which may adversely affect your portfolio value. KENYASHARES makes no express or implied warranties of any kind concerning the companies or entities listed on this site. KENYASHARES strongly advises that you consult with an experienced financial or investment advisor prior to making any transactions.