Stocks

Steps in an IPO Process:

Let us now have a look at how an initial public offering process is initiated and reaches its conclusion. The entire process is regulated by the 'Securities and Exchange Board of India (SEBI)', to prevent the possibility of a fraud and safeguard investor interest.

Selection of Investment Bank

The first thing that company management must do when they have taken a unanimous decision to go public is to find an investment bank or a conglomerate of investment banks that will act as underwriters on behalf of the company. Underwriter's buy the shares of the company and resell them to the general public. The company must also hire lawyers that can guide them through the legal maze that an IPO setup can be. It must be ready with detailed financial records for intensive fiscal health scrutiny that SEBI would perform. Some companies may also opt to directly sell their shares through the stock market, but most prefer going through the underwriters.

Step 1: Preparation of Registration Statement

To begin an IPO process, the company involved must submit a registration statement to the SEBI, which includes a detailed report of its fiscal health and business plans. SEBI scrutinizes this report and does its own background check of the company. It must also see that registration statement fulfils all the mandatory requirements and satisfies all rules and regulations.

Step 2: Getting the Prospectus Ready

While awaiting the approval, the company, with assistance from the underwriters, must create a preliminary 'Red Herring' prospectus. It includes detailed financial records, future plans and the specification of expected share price range. This prospectus is meant for prospective investors who would be interested in buying the stock. It also has a legal warning about the IPO pending SEBI approval.

Step 3: The Roadshow

Once the prospectus is ready, underwriters and company officials go on countrywide 'roadshows', visiting the major trade hubs and promote the company's IPO among select few private buyers (Usually corporates or HNIs). They are fed with detailed information regarding company's future plans and growth potential. They get a feel of investor response through these tours and try to woo big investors.

Step 4: SEBI Approval & Go Ahead

Once SEBI is satisfied with the registration statement, it declares the statement to be effective, giving a go ahead for the IPO to happen and a date to be fixed for the same. Sometimes it asks for amendments to be made before giving its approval. The prospectus cannot be given to the public without the amendments suggested by SEBI. The company needs to select a stock exchange where it intends to sell its shares and get listed.

Step 5: Deciding On Price Band & Share Number

After the SEBI approval, the company, with assistance from the underwriters decide on the final price band of the shares and also decide the number of shares to be sold.

There are two types of issues: Fixed Price and Book Building

Fixed Price - In a Fixed price issue - the company decides the price of the share issue and the number of shares being sold. Ex: ABC Ltd public issue of 10 lakh shares of face value Rs. 10/- each at a premium of Rs. 55/- each is available to the public thereby generating Rs. 6.5 Crores.

Book Building - A Book building issue helps the company discover the price of the issue. The company decides a price band and it gives the investor an option to choose the price at which he/she wishes to bid for the company shares. Ex: ABC Ltd issue of 10 lakh shares of face value Rs. 10/- each at a price band of Rs. 60 to 70 is available to the public thereby generating upto Rs. 7 Crores. Here the amount generated through the issue would depend on the highest amount bid by most investors.

Step 6: Available to Public for Purchase

On the dates mentioned in the prospectus, the shares are available to public. Investors can fill out the IPO form and specify the price at which they wish to make the purchase and submit the application. This open period usually lasts for 5 working days which is a SEBI requirement.

Step 7: Issue Price Determination & Share Allotment

Once the subscription period is over, members of the underwriting banks, share issuing company etc will meet and determine the price at which shares are to be allotted to the prospective investors. The price would be directly determined by the demand and the bid price quoted by investors. Once the price is finalized, shares are allotted to investors based on the bid amounts and the shares available.

Note: In case of oversubscribed issues, shares are not allotted to all applicants.

Step 8: Listing & Refund

The last step is the listing in the stock exchange. Investors to whom shares were allotted would get the shares credited to their DEMAT accounts and for the remaining the money would be refunded.

Terminologies in Stock Market

Act of 1911 and 1915

These are used for developments within a particular district. These bonds are secured by special assessment taxes set at a fixed dollar amount for the life of the bond. 191 1 Act Bonds are secured by individual parcels. 1915 Act Bonds are secured by all properties within the district.

Ad Valorem Tax

A tax based on the value of the property

Advance Refunding

The replacement of debt prior to the original call date via the issuance of refunding bonds.

Authority (Lease Revenue)

A bond secured by the lease between the authority and another agency. The lease payments from the "city" to the agency are equal to the debt service.

Bond Anticipation Notes

Short term securities issued in anticipation of a larger bond issue. The government may wish to combine several of these smaller issues into one large issue.

Callable Bond

A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

Certificate of Participation (COP)

Financing whereby an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. Usually issued by authorities through which capital is raised and lease payments are made. The authority usually uses the proceeds to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur.

Convertible Bond

A bond, which is convertible into common stock

Securities And Exchange Commission (SEC)

A self-regulatory organization with jurisdiction over certain broker-dealers. The NASD requires member brokers to register, and conducts examinations for compliance with net capital requirements and other regulations. It also conducts market surveillance of the over-the-counter (OTC) securities market. NASDAQ is a subsidiary of the NASD, which facilitates the trading of approximately 5,000 of the most active OTC issues through an electronically connected network.

Over-the-counter (OTC) Stocks

Stocks not traded on a national securities exchange.

OTC Margin Bond

A debt security not traded on the national securities exchange, which meets certain Regulation T requirements as to size of original offering, available information, and status of interest payments.

Purpose Credit

Credit used for the purpose of buying, carrying, or trading in securities.

An independent agency of the U.S. government consisting of five members appointed by the President that administers comprehensive legislation governing the securities industry.

Self-Regulatory Organizations (SRO)

Non-government organizations that have statutory responsibility to regulate their own members such as the NYSE, AACX, and NASD.

Street Name

Securities held in the name of brokers, or banks, or their nominees, instead of in the customer's name.

Glossary of Options And Futures Related Terms

American-Style Option

An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options in the United States are American-style.

Arbitrage

The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Assignment

Price moves in a single direction and it usually closes on an extreme for the day.

A measurement of how much an options price changes for a 1% change in volatility.

Glossary of Securities Credit Terms

Trend line

Constructed by connecting a series of descending peaks or ascending troughs. The more times a trend line has been touched increases the significance of a break in the trend line. It may act as either support or resistance.

Uncovered Option

This is sometimes referred to as a naked option. It is when a trader writes an option without owning the underlying security. It is a position with large risk.

Variable Ratio Write

An options strategy in which a trader writes 2 or more options contracts for every 100 shares owned. Each option has a different strike price.

Vertical Spread

An options strategy, which is also, a spread where the options have different strike prices but the same expiration dates.

Volatility

The measurement of how much an underlying security fluctuates over a period of time.

Warrant

A long-term security, which is similar to an option. A stock warrant usually allows a trader to purchase one share of stock at a fixed price for a certain period of time.

Write

To write an option is to sell an option. The person who sells the option is considered to be the writer.

Broker-Dealer

Any person, other than a bank, engaged in the business of buying or selling securities its own behalf or for others.

Brokers' Loans

Money borrowed by brokers from banks for uses such as financing specialists' inventories of stock, financing the underwriting of new issues of corporate and municipal securities, and financing customer margin accounts.

Day Trade

Also know as a "daylight trade." The purchase and sale or the short sale and cover of the same security in a margin account on the same day.

Exempted Security

A security that is exempted from most provisions of the securities laws, including the margin rules. Such securities include U.S. government and agency securities, and some municipal securities designated by the SEC.

Federal Margin Call

A brokers demand upon a customer for cash, or securities needed to satisfy the required Regulation T down payment for a purchase or short sale of securities. The word federal is usually omitted from the phone call. Generally, the broker will call up and say, " margin call ". Anyone receiving a margin call has to transfer additional funds into his account to meet the Regulation T minimum margin requirements.

Futures

Contracts that require delivery of a commodity of specified quality and quantity, at a specified price, on a specified future date. Commodity futures are traded on a commodity exchange and are used for both speculation and hedging.

Margin

With regard to securities, this term refers to a fractional amount of full value, or the equity outlay (down payment) required for an investment in securities purchased on credit. Different exchanges, and investment instruments have different margin requirements. Additionally, brokerage firms may use the minimum exchange level for their clients margin accounts or they may have higher levels. Refer to each specific exchange, broker, and investment vehicle, for the specific margin requirements.

Margin Stock

Any stock listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or appearing on the Boards list of over-the- counter margin stock and most mutual funds. There are certain requirements a stock must meet before it can be margined. The most important of which is that the price must be greater than $5.00

National Association Of Securities Dealers (NASD)

The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At-The-Money

An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. Back Months the futures or options on futures months being traded that are farthest from expiration. Bear One who believes prices will move lower.

Call

An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Bear Market

A market in which prices are declining.

Bid

The price that the market participants are willing to pay

Bull

One who expects prices to rise.

Bull Market

A market in which prices are rising.

Buy On Close

To buy at the end of a trading session at a price within the closing range.

Buy On Opening

To buy at the beginning of a trading session at a price within the opening range.

Capped-Style Option

A capped option is an option with an established profit cap. The cap price is equal to the options strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Options cap price.

Class Of Options

Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.

Close, The

The period at the end of the trading session, Sometimes used to refer to the Closing Range (or Range)

The high and low prices, or bids and offers, recorded during the period designated as the official close

Closing Purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.

Closing Sale

A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options

Commission (or Round Turn)

The one-time fee charged by a broker to a customer when a futures or options on futures position is liquidated either by offset or delivery.

Contract

Unit of trading for a financial or commodity future. Also, actual bilateral agreement between the parties (buyer and seller) of a futures or options on futures transaction as defined by an exchange.

Contract Month

The month in which futures contracts may be satisfied by making or accepting delivery.

Covered Call Option Writing

A strategy in which one sells call options while the underlying security or strategy in which one equivalent position in the underlying security.

Simultaneously owning an equivalent position in sells put options and simultaneously is short an

Day Order

An order that is placed for execution during only one trading session. If the order cannot be executed that day, it is automatically canceled.

Day Trading

Establishing and liquidating the same position or positions within one day's trading. The day is ended with no established position in the market.

European-Style Options

Another term for "back months." Delivery The tender and receipt of an actual commodity or financial instruments or cash in settlement of a futures contract.

Derivative Security

A financial security whose value is determined in part from the value and characteristics of another security. The other security is referred to as the underlying security.

Equity Options

Options on shares of an individual common stock.

An option contract that may be exercised only during a specified period of time just prior to its expiration.

Exercise

To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise settlement amount

The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expiration Cycle

An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle, LEAPS are not included in this cycle.

Expiration Date

Date on which an option and the right to exercise it, cease to exist.

Expiration Time

The time of day by which all exercise notices must be received on the expiration date.

Floor Broker

An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executing orders must be licensed by the exchange he is working on.

Floor Trader

An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a "local."

Futures

A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange.

Futures Commission Merchant

A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC.

Hedge

A conservative strategy used to limit investment loss by effecting a transaction, which offsets an existing position.

Holder

The party who purchased an option. Initial Performance Bond the funds required when a futures position (or a short options on futures position) is opened. Sometimes referred to as Initial Margin)

In-the-money

A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.

Intrinsic Value

The amount by which an option is in-the-money.

LEAPS

Long-term Equity Anticipation Securities are long-term stock or index options. LEAPS are available in two types, calls and puts. They have expiration dates up to three years in the future.

Limit Order

An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price.

Liquidation

Any transaction that offsets or closes out a long or short futures or options position.

Long Hedge (futures)

The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against and advance in the cash price

Long Position

An investor's position where the number of contracts bought exceeds the number of contracts sold. He is a net holder.

Maintenance Performance Bond (Previously referred to a Maintenance Margin)

A sum, usually smaller than, but part of, the initial performance bond, which must be maintained on deposit in the customer's account at all times. If a customer's equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer's equity in the account to the initial margin level.

Margin Requirement For Options

The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.

Mark-To-Market

The daily adjustment of margin accounts to reflect profits and losses.

Market Order

An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Maximum Price Fluctuation (futures)

The maximum amount the contract price can change, up or down, during one trading session, as stipulated by Exchange rules.

Minimum Price Fluctuation

Smallest increment of price movement possible in trading a given contract, more commonly referred to as a "tick."

Nearby

The nearest active trading month of a futures or options on futures contract. It is also referred to as "lead month."

Offer

The price at which an investor is willing to sell a futures or options contract. Offset buying if one has sold, or selling if one has bought, a futures or options on futures contract.

Open Interest

Total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery, An indicator of the depth or liquidity of a market (the ability to buy or sell at or near a given price) and of the use of a market for risk- and/or asset-management.

Open Order

An order to a broker that is good until it is canceled or executed.

Opening Purchase

A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.

Opening Sale

A transaction in which the seller's intention is to create or increase a short position in a given series of options.

Open interest

The number of outstanding option contracts in the exchange market or in a particular class or series.

Out-Of-The-Money

A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Out-Trades

A situation that results when there is some confusion or error on a trade. A difference in pricing, with both traders thinking they were buying, for example, is a reason why an out-trade may occur.

Performance Bond Call

Previously referred to as Margin Call. A demand for additional funds because of adverse price movement.

Premium (options)

An options price has two components. They are the intrinsic value and time value. Premium is often referred to as time value. In the money call option - option strike 65. Underlying security is 67. Option price is 3. This is two points of intrinsic value and I point of premium. An out of the money call where the strike, price is 65 and the underlying security is at 63 and the price of the option is I- 1/2. The premium would be I- 1/2. As there is no intrinsic value.

Premium (futures)

The excess of one futures contract price over that of another, or over the cash market price. Or, The amount agreed upon between the purchaser and seller for the purchase or sale of a futures option. Remember that purchasers pay the premium and sellers (writers) receive the premium.

Put

An option contract that gives the holder the right to sell the underlying security at a specified price for a fixed period of time.

Rally Reaction

A decline in prices following an advance. The opposite of rally. An upward movement of prices following a decline; the opposite of a reaction.

Registered Representative

A person employed by, and soliciting business for, a commission house or a broker dealer. Many times referred to as a broker.

Round-Turn (futures)

Procedure by which a long or short position is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

Scalp

To trade for small gains. Scalping normally involves establishing and liquidating a position quickly, usually within the same day, hour or even just a few minutes.

Secondary Market

A market that provides for the purchase or sale of previously sold or bought options through closing transactions. Stock exchanges and the Over The Counter market are examples of the secondary market.

Series

All option contracts of the same class that also have the same unit of trade, expiration date and strike price.

Settlement Price (futures)

A figure determined by the closing range that is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries.

Short Hedge

Redevelopment Agency (Tax Allocation)

Bonds used to finance the construction of manufacturing or commercial facilities for a private user. These bonds are arranged through an Industrial Development Authority. Their safety is related to the credit worthiness of the corporate guarantor.

Mello Roo's

Bonds used for developments that benefit a particular district (schools, prisons, etc.) and are secured by special taxes based on the assessed value of the properties within the district. Tax assessment is included on the county tax bill.

Moral Obligation Bonds

Bonds sold by the states without voter approval, which are used for specific purposes. In the event of a shortfall, it is implied that the state will make up the difference

Par Value

The face value of a bond, generally $ 1,000.

Premium Bond

A bond that is valued at more than its face amount.

Principal

The amount owed; the face value of a debt.

Bonds secured by all of the property taxes on the increase in assessed valuation above the base, on properties in the project.

Revenue Anticipation Notes

Securities issued in anticipation of future revenue typically from the federal or state governments.

Revenue Bonds

Bonds secured by the revenues derived from the earnings of a particular service provided by the issuer.

Senior

Describes the order of priority of a claim. Instruments, which are senior to other instruments, receive priority in repaying debt in the case of a default.

Sinking Fund

The sale of a futures contract in anticipation of a later cash market sale. Used to eliminate or lessen the possible decline in value of ownership of an approximately equal amount of the cash financial instrument or physical commodity.

Short Position

An investor's position where the number of contracts sold exceeds the number of contracts bought. The person is a net seller.

Stop Order (Stop)

An order to buy or sell at the market when and if a specified price is reached.

Strike price

The stated price per share for which the underlying security may be purchased in the case of a call, or sold in the case of a put, by the option holder upon exercise of the option contract.

Time value

The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value. This is often referred to as premium.

Type

Describes either a put or call.

Uncovered call writing

A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

Uncovered put writing

A short put option position in which the writer does not have a corresponding short position in & underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Underlying security

The security subject to being purchased or sold upon exercise of the option contract.

Volatility

The measure of the fluctuation in the market price of the underlying security. Mathematically, Volatility is the annualized standard deviation of returns. See the sections in 'Options', which describes implied and historical volatility.

Writer

A bond with special funds set aside to retire the term bonds of a revenue issue each year according to a set schedule. Usually takes effect 15 years from date of issuance. Bonds are retired through calls, open market purchases, or tenders.

Tax Anticipation Notes (TAN)

Securities issued in anticipation of future tax collections.

Taxable Equivalent Yield

The taxable equivalent yield is equal to the tax-free yield divided by the sum of 100 minus the current tax bracket. For example the taxable equivalent yield of a 6.50% tax free bond for someone in the 32% tax bracket would be: 6.5/(100-32) = 0.0955882 or 9.56%

Yield

A measure of the income generated by a bond. The amount of interest paid on a bond divided by the price.

Yield to Maturity

The rate of return anticipated on a bond if it is held until the maturity date.

1. Foreign participation rate was strong, Inflow of funds of around RM10.7 billion into the equity market.
2. inflow was in line; bucking the trend in Asia which experienced an outflow.

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