What is IPO Key Terms Related to Initial Public Offering

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Marketopedia / Stock Markets Basic / What is IPO Key Terms Related to Initial Public Offering

Once the IPO is complete, the company is listed on an exchange and trading of its stock can begin. The newly-listed stock is then available to be bought and sold by the public. Investors now have access to the company’s shares, allowing them to own part of a publicly traded entity.

When investing, one can bid for shares within the given price range during the bidding process. This part is known as the Primary Market at the time of offering, and once those stocks are listed on a stock exchange and trading begins, it’s referred to as the secondary market.

Once the stock transitions from primary to secondary markets, it gets traded daily on the stock exchange. People buy and sell these listed shares on a regular basis.

In the following chapters, we will address a variety of questions around trading and stock prices, including why it is done and what influences its fluctuation.

Few IPO Jargons: 

You need to be aware of a few terms when considering whether or not to invest in an IPO. It’s important to understand these words to make an informed decision.

  1. Under subscription 

Let’s say the company wants to offer 175,000 shares to the public, but during the book-building process, only 150,000 bids are received. That means it is under-subscribed, which isn’t favourable as it hints at negative sentiment from the public.

  1. Oversubscription

If there are double the quantity of bids than shares up for grabs, this is referred to as “oversubscription”, and in such a case, the issue can be said to be two times (2x) oversubscribed.

  1. The Green Shoe Option 

It is a feature of the issue document that permits the issuer to distribute an extra amount of shares, typically 15 per cent, in case of oversubscription. It is also referred to as the over allotment option.

  1. Fixed Price IPO

Companies sometimes opt not to use a price band and, instead, fix the price of the IPO. This is known as a fixed-price IPO.

  1. Price Band and Cut off price

The price band for a stock is the range of listing prices. For instance, Rs.105 to Rs.110 is a possible band – if the issue is listed at Rs.125, this would be considered the cut-off point.