Author name: Vidfin

You probably think that IPO was the only way for companies to make money through their stocks. Well, it turns out that it is only one of the many ways. You must know that IPO is just the starting point. Even after it, companies can make money from stocks through things like FPOs (Follow on Public Offer), buybacks, rights issue, etc. What happens after the IPO? After the IPO, the company’s stock becomes available for trading and investing on the stock exchanges. The company can also distribute a portion of its profits as dividends to its shareholders. Interested investors can purchase shares of the respective companies directly through a Demat account. How Companies Make Money from Stocks? After the IPO also a company can make money from its stocks. The most commonly practiced ones are listed below. By Issuing FPO (Follow on Public Offer) Companies wanting to raise more money from investors after their IPO often go for FPO (Follow on Public Offer). With an FPO, the company issues new shares to investors. It is done secondary to the IPO. Share Buybacks Companies buy back their shares at either market price or a higher price. This, in turn, can shoot up the stock price, which increases the net value of a company. However, it does not earn them money directly but rather improves their net value. Block Deals The company sells its shares in bulk quantity to interested HNIs (High Net Worth Individuals) and Institutional Investors at a price decided mutually by the two parties. Rights Issue A rights issue is a way for a listed company to raise additional capital by offering new shares to its existing shareholders, usually at a discounted price than the one available in the market and in proportion to their current holdings. Using Stock as Currency Public companies often use their stock as currency to acquire other businesses within or outside their operating sector. Instead of regular currency, companies make payments in the form of their stocks, which can be liquidated by the other part as and when needed. It is a preferred method because significant gains can be made if the share price appreciates in the coming years. Raise Capital Companies use their stocks as collateral to raise capital in the form of debt or by issuing bonds. The money raised is then used for the company’s growth and expansion. However, one must also understand that the company does not make any money from the daily price movements of the stock. Promoters make their money by liquidating their shares in the market. How Companies Use Money Made from Stocks after the IPO? Companies use the money generated from stocks after the IPO in several ways: Repay Debt: The company uses the money from the IPO and afterwards to pay off the debt and other financial obligations. Research and Development: Investing money into research and development is crucial for not lagging in terms of technology. Launching New Products: Money is used for launching and testing new products in the market to add new revenue methods. Working Capital Requirements: These include paying salaries, managing inventory, and handling supplier payments. Mergers & Acquisitions: Money is used to make strategic acquisitions of smaller players. It is important for you as an investor to monitor the company’s activity concerning it stock as it can indicate any existing red flags regarding the top management and promoters. However there are various methods through which companies raises capital while starting the journey. Final Thoughts An IPO is a great way for businesses to raise capital and allow people to invest as per their capacity. Even post the IPO, companies can continue using stocks to make money. The money thus generated is used for the growth of the company. For investors, knowing the activity of a company concerning its stock can help them make better investing decisions. It might also indicate the future potential of the underlying business management. FAQs

If you are a budding entrepreneur or are interested in knowing about businesses, you might be interested in knowing the different ways through which businesses raise capital. Any business needs to raise capital to expand, fund operations, invest in new projects, acquire smaller players within the industry, etc. Companies can adopt various methods of raising capital that best suits their needs in the right way possible. Your favorite startups are probably also using these same methods to raise capital for running their businesses. Different Methods of Raising Capital Businesses can choose to raise capital through a certain method that suits their requirement. Majorly, businesses raise capital through: Equity Financing Equity financing is a way to raise capital by selling equity (ownership) in a business to investors. Below are various ways to do equity financing. IPO (Initial Public Offering): Through IPO, a business raises capital by offering equity shares to investors through the stock market. This is also the first time that a company offers shares to the public and offers ownership in its business. Pros Cons Can raise large capital Lack of control Increased public credibility High regulatory costs FPO (Follow-on Public Offering): This is the second time a company offers additional equity shares after the IPO. It is like a second round of fundraising from the public. It is often done by PSUs (Public Sector Undertakings) or firms needing capital for growth. Pros Cons Good for expansion More ownership dilution Capital raise from existing market presence Share price may decline Private Capital: Private capital refers to money invested in companies that are not listed on the stock exchange. It usually comes from private investors, venture capitalists, and private equity firms. This involves raising capital through private investors in exchange for equity. Private equity firms take up a significant portion of the equity in exchange for a lump sum capital. Pros Cons No public listing Exit Pressure Funding with strategic guidance High-performance expectations Venture Capital: It is a type of private capital usually provided by venture capital firms in exchange for equity ownership in the company. Businesses, usually start-ups, raise capital from venture capitalists (investors in early-stage or high-growth start-ups). Pros Cons Ideal for early stage start ups Difficult to secure Gives access to networks and expertise Influences major decisions Angel Investor: An angel investor is a wealthy individual who invests their own money into early-age start-ups, usually when the startup is in its very initial days. Capital is raised in exchange for equity from high-net-worth individuals. Pros Cons Funding with flexible terms High equity dilution Mentorship opportunity Limited capital Rights Issue: It involves offering existing shareholders additional shares but at a discounted price than the market. It’s a way for a company to raise capital without going to new investors. It keeps control within the existing shareholders. Pros Cons Less expensive than IPO Not always fully subscribed Capital from existing shareholders Can indicate financial weakness Debt Financing Businesses take debt from banks or other financial institutions at a given interest rate to meet their financial obligations. Ways of debt financing are mentioned below Bank Loans: These are traditional loans from banks borrowed at a specific rate of interest, which the company has to return in the future through monthly installments (EMIs). Pros Cons No equity dilution Requires collateral Structured repayment Interest burden Debenture and Bonds: They are long-term debt instruments issued to the public or institutions. These instruments are issued at a fixed interest rate that is paid by the company to the buyers of bonds.  Pros Cons Flexible terms Requires regulatory compliance Tax benefits Risk of default Commercial Papers: These are short-term unsecured promissory notes, usually for working capital. It’s like an IOU issued by the company to investors, promising to pay back the money within the specified period. Pros Cons No collateral required Limited to short durations Good for working capital Only for financially strong companies External Commercial Borrowings: These are loans from foreign institutions in foreign currency. It can be thought of as international borrowing. Pros Cons Access to foreign capital Requires RBI approval Diversify funding sources Exposed to currency risks Internal Financing It utilises the company’s resources to finance its needs. Internal financing happens through the following ways. Retained Earnings: It is reinvesting profits from sales of goods/services rather than paying out dividends. It is a self-funded growth strategy. It is calculated as: Retained Earnings = Net Profits – Dividends Paid Pros Cons No capital cost Limits dividend payouts Shows business profitability Slow capital accumulation Pros: Cons: Asset Sales: It means selling of under or non-performing assets like land, machinery, etc., to generate cash that can be put to various uses by the company. Pros Cons Unlocks cash from assets Indicates liquidity issue No impact on debt or equity Reduction in long-term asset base Pros: Cons: Depreciation Funds: It uses accumulated depreciation as an internal cash resource Pros Cons No dilution of equity Reduces net income Supports replacement of worn-out assets Limited to book value amounts Equity Financing Debt Financing Internal Financing New shareholders get a stake No dilution of ownership No ownership dilution No repayment needed Repayment along with interest  No repayment High Cost of Capital Moderate Cost of Capital Low Cost of Capital Shareholders may control decision making Lenders have no say in decision making No effect on control over decision making Example: IPO, FPO, Private Equity Example: Loans, Bonds, Debentures Example: Funds from profits, sale of assets Need for Raising Capital Businesses raise capital for the following reasons Final Thoughts Raising capital is an important aspect of running a business, whether large or small. Different methods of raising capital allow companies of different scales and sizes to meet their funding needs. Factors such as business need, ability to repay, and equity dilution should all be considered before a capital raise. If done in the right manner, raising capital can help businesses expand into new markets, set up factories, and pay off other debts to grow a business. FAQ

The Face Value of a share is a concept that can sound strange to you. What we see regularly in the stock exchange is the market value of a particular share. Face value is quite different from the market value of a stock. Face Value is the original value of the share that is assigned by the company while issuing it. Interestingly, the face value does not change with the stock price. Let’s take an example. Imagine you have a sticker collection, and the price written on each sticker is ₹10. This ₹10 is the face value. Now, if you take these stickers to the market and decide to sell them because they are cool and rare, people are ready to buy them at ₹50 per sticker. This ₹50 is the market value (what people are ready to pay) of these stickers. But no matter the price people are willing to pay, the face value remains intact at ₹10. How Face Value is Calculated Calculating the face value of a stock is simple and does not require any complex formula. The company predetermines it at the time of issuing shares. However, it can be calculated using: Face Value = Equity Share Capital/Total Number of Outstanding Shares Let’s understand with the help of an example: Let’s suppose a company has: ₹10,00,000 in total equity share capital & 1,00,000 equity shares are issued Then, Face Value = 10,00,000/1,00,000 = ₹10 per share  Key Things to Know About Face Value Uses of Face Value Calculation of Dividend: Companies often declare dividends as a percentage of the face value, not the market price of the share. Stock Spilts and Bonus Issues: Face value is adjusted during a stock split or bonus share issue. For example, a stock split reduces the face value (let’s say from ₹10 to ₹5) while increasing the total number of shares. Calculating Share Capital: Total Equity share capital is calculated using face values. Share Capital = Face Value * Number of shares issued Regulatory Filings and Accounting: In financial statements, face value helps break down capital structure and is required at the time of statutory filings. Understand Pricing: In IPOs and FPOs, the issue price includes a premium in addition to the face value. Dividend Yield Comparison: Knowing the face value helps calculate the dividend yield, especially in cases where the dividends are declared as a percentage of the face value. How is Face Value Different from Market Value Feature Face Value Market Value Definition The original value of the share set by the company at the time of issuance. Current trading price of the stock. Decided By The company Demand and Supply in the stock market Fluctuations None. It remains constant It keeps on fluctuating Used For Calculating share capital, dividend yields, and stock split Buying/selling shares for trading or investing Example ₹1, ₹2, ₹5 or ₹10 ₹756 as per the LTP (Last Traded Price) on the stock exchange. Final Thoughts Face value has its significance when trying to understand the value of a share. Although it might not play a big role when analysing the fundamentals of a company before investing.  However, it is still helpful in evaluating the pricing of IPOs and FPOs. It also helps you understand bonus share issues and stock splits. FAQ

Are you a Zerodha user but don’t know how to purchase an IPO in Zerodha? Well, this article has got you covered. Get the stepwise process to purchase IPO (Initial Public Offering) through Zerodha’s web and application platform. You can use both the UPI as well as the ASBA (Application Supported by Blocked Amount) method. You must know what is an IPO before applying for one. Well, an IPO is the first time a company offers its equity shares to the public via stock exchange. You can apply to the IPO through your Zerodha Demat account. How to Purchase IPO in Zerodha App through UPI To purchase an IPO through the Zerodha website, follow the steps given below Step 1 Open the Zerodha Kite App Step 2 Tap on the Bids section Step 3 Tap on IPO Step 4 Select the IPO you want to apply for from the given list of IPOs. Tap on apply Step 5 Tap on apply once more. Now enter the UPI ID. Step 6 Enter the quantity and price. The quantity entered must be a multiple of the predetermined lot size. The price entered must be within the price bid range. Step 7 Tap on the undertaking tick box and swipe the Submit button Step 8 Accept the mandate on the UPI App How to Purchase IPO in Zerodha Website through UPI To purchase an IPO through the Zerodha website, follow the steps given below Step 1 Log in to the Zerodha Kite web platform. Step 2 Click on the Bids section. Step 3 Click on IPO and select the IPO you want to apply for from the given list. Step 4 Click on apply Step 5 Click on the investor type and select your investor category Step 6 Enter the UPI ID Step 7 Now, enter the quantity and price. The quantity entered must be a multiple of the predetermined lot size. The price entered must be within the price bid range. Step 8 Click on the Submit button. Step 9 Accept the payment mandate on the UPI app. The UPI mandate can be accepted until 5 pm on the closing day of the IPO. How to Purchase IPO in Zerodha through ASBA (Application Supported by Blocked Amount) ASBA (Application Supported by Blocked Amount) is a method where the investor’s money for IPO application stays in their bank account but is temporarily blocked until the IPO shares are alloted. If the allotment is made, the money gets debited from the bank account; if not, the funds are unblocked.  IPO application using online ASBA Method IPO application using offline ASBA Method Key Terms associated with IPO Investors should know the terminology of IPO proceedings, such as.  Price Band: It is the price range within which investors can place their bids. Lot Size: It refers to the minimum number of shares you can apply your bids for. Allotment: It is the process of distributing/allotting shares to investors. Listing: This is when the stock starts trading on the stock exchange. Final Thoughts Applying for an IPO through Zerodha is easy and seamless through any of the discussed methods for purchasing IPO. It is up to the investor to decide which method of purchasing an IPO in Zerodha suits them. The process of purchasing an IPO is similar for other discount stockbrokers as well. Applying through multiple demat accounts might increase your chances of getting an IPO allotment. Meta Description: Know the stepwise process to purchase an IPO in Zerodha. Understand the offered methods for IPO purchase and key IPO terminology. FAQ

Ever wondered if it is possible to buy a stock before an IPO? The simple answer is Yes. But not in all cases. You can buy shares of companies that are not listed on the exchange in various ways. Some of them include buying unlisted shares from an online marketplace, or in a pre IPO round (limited to select investors). This article will guide you through the world of pre IPO investing discussing its pros and cons. It will help you decide which companies to go for before they become listed on the stock exchange. What is Pre-IPO Investing? Pre IPO investing means buying shares of a company before it goes public via an IPO (Initial Public Offering). It generally offers an opportunity to buy equity at a lower price and attractive valuation expecting that the share price would rise significantly post IPO listing. Key Features of Pre IPO Investing Why Pre IPO is offered? Who can Invest? Opportunity for early entry To raise funds prior to IPO High Net Worth Individuals (HNIs) Potential for higher return on investment To allow early investors, VCs, and employees (via ESOPs) to take an exit. Retail Investors through unlisted share platforms Risk involved is also high To create a buzz among the investors just around the IPO takes place Venture Capitalist and Private Equity Firms SEBI mandates a 6 months of lockin period post IPO Financial Institutions How to Buy Shares before IPO? Company shares can be bought before the actual IPO in a variety of ways. The most copmmon ones are described below 1. Online Marketplaces: Investors can buy unlisted shares online from platforms like: These marketplaces specialize in buying and selling of unlisted shares. Liquidity may be an issue when dealing on these platforms. 2. ESOP Buyouts: Companies at an early stage offer their top management and employees ESOPs (Employee Stock Option Plans). If allowed investors can buy these from employees wanting to cash in their ESOP. Doing so might require a good network. 3. Mutual Funds: Mutual Funds often pool money from investors to invest in companies that are yet to be listed on the stock exchange. But these opportunities might be limited to high net worth individuals. 4. Off Market Transfer: Pre IPO shares can be transferred via off market deals between two demat accounts. It will require a Delivery Instruction Slip (DIS) or initiating an online transfer. Popular Unlisted Shares Unlisted shares of many famous new age companies are mentioned below: Unlisted Company Unlisted Share Price NSE ₹1700 OYO ₹48 BoAt ₹1705 HDB Financial Services Limited ₹1050 LAVA International ₹50 Hero Fincorp Limited ₹1400 Polymatech Electronics ₹56 Advantages and Disadvantages of Buying Pre IPO Stock Buying Pre IPO stocks come with their own advantages and disadvantages. Advantages 1. Early Entry at lower valuation: Pre IPO shares are often priced lower than the IPO and post listing expected price. 2. High Return Potential: The potential from listing gains can be high even multifold in some cases. 3. Access to high growth companies: Investing prior to an IPO allows investors to tap into the early growth phase of a company. 4. Portfolio Diversification: Including unlisted shares into your investment portfolio can give you a hedge as it is a non correlated asset. 5. Limited Public Competition: Most conventional investors try to stay away from such risky investments therefore the competition stays limited. Disadvantages 1. Liquidity Risk: Buying Pre IPO stocks comes with the issue of liquidity. They are not easily tradeable. The holding period can go until the IPO if no corresponding buyer is available. 2. Regulatory Lock In: SEBI has mandated a lockin period of 6 months period post IPO listing. It bars investors to liquidate their shares till 6 months. 3. Valuation Uncertainity: Pre IPO valuation are not certain and can be inflated to attract investors. Investors should make due diligence before making an investment. 4. Lack of Information: Unlisted private companies are not required to disclose much of their financial data as compared to the listed ones. 5. Minimum Investment Requirement: There is a minimum investment requirement to purchase shares of unlisted companies which might make it unfeasible for some investors. Final Thoughts Buying pre IPO stock can be rewarding but comes with associated risks. Therefore, investors should have a clear understanding of such an investment. It is important not to be driven with the astonishing returns they can make.  Conventional investors can choose to stay away. On the other hand investors with substantial risk appetite can allocate a small chunk of their overall portfolio into acquiring pre IPO stocks but only after a fair amount of research and analysis. FAQ

If you are a beginner investor, then understanding book value is crucial for you. By knowing the book value, you can make a smarter investment decision. Book value in the stock market refers to the net asset value of a company. To understand in simple terms, book value represents the total value that the existing shareholders will get if the company were to be liquidated today. What is Book Value in Stock Market? From a fundamental analysis point of view, book value represents the net worth of the company. To calculate book value, simply subtract the total liabilities of a company from its total assets. For example, if a company has total assets worth ₹100 Crore and total liabilities worth ₹60 Crore. Then the book value of the company is said to be ₹60 Crore. Investors use book value to identify whether a stock is undervalued or overvalued. If a stock is trading lower than its book value, it may be a good opportunity to invest, given the company stands strong on other financial parameters. How is Book Value Calculated To calculate the book value, use the following  formula: Book Value = Total Assets – Total Liabilities This gives the total net worth of the company in its balance sheet. To calculate the book value per share (BVPS), use this formula instead: Book Value = (Total Assets – Total Liabilities) / Total Outstanding Shares Example: Let us consider a listed company ABC having: Total Assets = ₹500 crore   Total Liabilities = ₹200 crore   Total Outstanding Shares = 10 crore   Now the Book Value = ₹500 crore – ₹200 crore = ₹300 crore And, Book Value Per Share = ₹300 crore / 10 crore = ₹30 per share Use of Book Value Book value is an important financial metric that can be used in multiple ways by investors as well as analysts. The most common uses of book value are listed in the table given below. Assessing a Company’s Net Worth Book value helps to understand the actual net asset value of a company. Investors use book value to know a company’s financial health and stability. Identifying Undervalued Stocks A stock can be considered undervalued if its market price (trading price) is below the book price. In that case, it can be a good investment option, given that other metrics hold up. Calculating Price-to-Book (P/B) Ratio Book value is needed to calculate the price-to-book (P/B) ratio of a stock. Comparing Companies Within the Same Industry Book value helps in comparing peers within the same or across similar industries. It is very useful for asset-heavy sectors like manufacturing, banking, and real estate. Making Informed Buy/Sell Decisions Investors look at the book value to decide if the growth of the company is rightly aligned with its asset base. Price to Book Ratio The price-to-book ratio is an important financial ratio that is used to compare the current market price of the stock to the company’s book value per share. The formula for calculating the price-to-book ratio is given below. Price to book ratio = Market Price / Book Value per share For Example: If a company has: Market Price per Share = ₹100   Book Value per Share = ₹50   Then its P/B Ratio = 100/50 = 2 It can be inferred that the stock is currently trading at two times its book value. How to interpret the Price to Book Ratio The price-to-book ratio can be interpreted in one of the following ways: P/B < 1: Stock may be undervalued (trading below net asset value)   P/B = 1: The stock is fairly valued  P/B > 1: Stock may be overvalued (investors are paying a premium) The price-to-book ratio is used especially for analyzing asset-heavy sectors such as banking and real estate. For companies in the tech and service sectors, price-to-book ratio might not present the complete picture. It is best to use the price-to-book ratio alongside other financial ratios like price to earnings, return on equity, etc. This would imply a better conclusion as to whether the stock is favorable for investment or not. Final Thoughts Both book value and ratios (price to book) derived using it are helpful to investors who want to thoroughly analyze the company from an investment point of view. Book value represents the total net worth of a company. The price-to-book ratio, on the other hand, compares the stock price with its book value per share. Combining both can offer valuable insights. However, it will be better if they are used alongside other quantitative and qualitative factors to make any final decision.