Both government and businesses raise capital by issuing securities to the public. The offerings have the two characteristics – debt obligations and ownership interest. Any government while offers investment strategies to the group it is a debt commitments (it’s a contract in features where offering guarantees benefits in you will be in the nature of interest payable either as per term stipulates in the contract), whereas when a company issues securities it can be either type – debt and ownership. Investors who prefers regular income generally opt for debt obligations and those who seeks capital appreciation (a rise in money value per unit of ownership) is generally known as “growth”.
Both the above security offerings are known as new issue, but the new issue of ownership interest security is better known as initial public offering (IPO). IPOs are ownership interest in the businesses that represent joint stock of shares issues to the public for the first time. It considered as the best investment security that creates instant wealth to an individual investor. This partial view of the media sometime creates hype and increases on the price of the first day’s of issue. Unfortunately, all IPOs are not hot and does not behave in the same way as expected by the investors.
Explosive price increase on the hype of media report represent a negligible percentage of total new issues offered to the investors. Moreover underwriters of the security propagates as if the offer price is almost next to zero, but possible.
Theoretically, IPOs are new issue securities but not all of them are issuing for the first time. A public limited company may issue of the same class of shares already held by the investors for raising their capital for many purposes. Sometimes the company may also issue different class of shares that differ from the earlier issued class of shares. Though both term as new issue but none is an IPO. So the new issue offering is an extra shares of a company that is already held by the investors. While on IPO share listing day only company share is available for trading by the investors.
Underwriting dealers (investment bankers) fix the offer price of the new issue . The price fixed to the investors and is at par of the capital need of the issuing company. But the success of the new issue depends on the demands by the market for that security. Higher demand will increase price, while low demand will fall the market price, below the offering price. So to judge the prospect of the new issue shares six basic factors are very important to know: (1) nature of share, (2) kind of sponsorship, (3)age of the businesses of the issuer, (4) estimation of the value of share, (5) sentiment of the market on the new issue on scrutiny the prospectus.
The investors should also carefully study all necessary guideline to avoid wrong investment. Influenced on tips by brokers and on information hyped by the medias and internet can end you to loss.