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Beginner’s guide to understanding IPO

Published On: November 17, 2017 09:55 AM NPT By: The Week Bureau

Unfortunately schools don’t teach us about the ways we can get our finances in order. So it isn’t uncommon to find young adults and adults alike who are fairly clueless about managing their money. What’s more, taking care of your financial future isn’t only about sticking to a budget and saving cash at a bank.

In fact, many experts believe that if you are not investing your money, you are wasting its possibilities. It’s indeed never too late to start. And over the years, in our country, one of the best opportunities to participate in the capital market has been considered by applying for primary offers in the primary market with Initial Public Offering (IPO).

Sandeep Bikram Rana from Sharesansar sees people keen to invest in them every day but, for those who are just getting started, he’s here to help you get acquainted with the scene. 

Applying for IPOs has never been easier.

“This is basically because of the new system that came through recently in the Nepali month of Shrawan,” explains Rana. They call it ASBA or Application Supported by Blocked Amount. Before its introduction, people had to fill forms to apply for IPOs and submit them at data collection centers. The process of clearing and reverting usually took 70 days, at the very least. Then there were also possibilities of issues such as delay in receipt, clearing or misplacement of refund orders and such. But now all these hassles have been eliminated.

With the now mandatory ASBA system, all you have to do is go to your bank and fill an ASBA form for your IPO or even Further Public Offering (FPO) and the bank itself will block the required amount from account. The account won’t be debited but the required cash will be blocked until shares are allowed to them. The process is often carried out within 20 days.

This Rana says has helped increase the popularity of an already popular IPO investment trend.

Motives for buying IPOs in our country are still predominantly misguided.

“I’m yet to hear of anybody who has suffered significant loss by investing in IPOs,” starts Rana. Most companies offer primary issues to the general public at the face value of Rs 100 per stock. So the risk is automatically lower than when you purchase stocks in the primary market at a much higher cost. The negative returns are genuinely incredibly rare.

But due to this nature of the investment, Rana also believes that there still prevails an unhealthy pattern in our country’s IPO investment trend. A common motive is to sell the shares at a higher rate in the secondary market. “Majority of the applicants come in thinking that this will give those profitable returns,” he says, adding, “They have already settled on selling the shares before purchasing them.”

Rana, for one, wants to encourage people to hold on to their IPOs. He even cites example of the likes of Nabil Bank. “They didn’t earn their reputation and worth overnight,” he states, stressing that those who didn’t sell the initial offering of the bank have gained a lot more today than they would have had they let it go. Rather than mere quick returns, he suggests, you might want to consider your long-term financial goals.

It pays to know your strategies than to just consider rumors.

Indeed, IPOs gives you an opportunity to buy shares at a lower cost and minimizes the risks compared to the primary market but as Rana puts it, “Even though your sole investment is Rs 1000, it has a lot of possibilities if you understand how you can make the investment work for you. Even if it is just a small investment, don’t be careless.”

As per the rules, whenever there are new primary issues from companies they are widely announced on various media platforms. You can rely on national newspapers in particular to give you the necessary details at least a week before they hit the market. Once the IPOs are out, you can also get your hands on their prospectus for more in depth details such as past performances, management info, projected performance, and so on. Many prudent investors also choose to consult licensed credit agency to look at the credit ratings before making any decisions.

This should be the normal protocol but Rana shares that even now there are many Nepali investors who base their decisions on the hype of the amount. Apparently, this applies to selling their shares as well. Cases of people choosing IPOs based on other people’s advices and also selling them just because they hear rumors of it being the “right time” are aplenty. 

Noting these unhealthy investment habits, places like Sharesansar have spotted the need to give classes for aspiring investors. Rana shares they spend an entire day’s worth of session on IPOs. From its benefits, application procedure to analysis, they insist on covering the basics so that you don’t have to be at the mercy of others’ understanding. Being capable of making independent decisions pays, quite literally.

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