The concepts of IPO (Initial Public Offering), FPO (Follow-On Public Offering), and the secondary market are quite easy to understand. Although, the primary fundamental principles of understanding how to invest will take a lot of trial and error. The topic of investment in itself is a vast realm that I will talk about in future posts. Regardless I want quickly plot out a pathway for people to start investing in the securities market.
From this article, you will learn the following things:
- What is an Initial Public Offering (IPO)
- At what prices are IPO’s usually sold in Nepal – Par value of an IPO
- What is a Follow On Public Offering (FPO)
- How to open a brokerage account to start trading in the Nepalese Stock Market
What is an Initial Public Offering (IPO)
To understand the concept of an IPO or an FPO for that matter, we need to first understand how companies raise capital(cash).
There are mainly two ways a company can raise money:
- Bonds or Debentures (Raising cash by taking a loan): You can understand Bonds as loans you give to a company so that you may receive a fixed amount of interest on that loan for a set amount of time. More on this in a later post.
- Shares (Raising money through investments): Companies can be divided into many individual pieces. These individual pieces are then sold to the public. The public will only buy these pieces if they expect that the pieces will generate a handsome return in the future.
Note: There are other methods of raising capital but Understanding these two at first will make things simpler.
So IPO is the issuance of shares to the public through which companies can raise money. A single investor cannot possibly buy all the shares of a large company, but many small investors can purchase the shares together. The company gets the money, which helps them to increase their productivity and growth while the investors get regular bonuses(more stocks) and dividends(Cash).
The concept of dividends and bonuses is quite complex to explain here and will require a separate post of their own.
At what prices are IPO’s usually sold in Nepal – Par value of an IPO
The par value or the face value of an IPO is somewhat speculative in foreign countries. They use something called the book building system. More on this in a future post. Mostly the par value of an IPO in Nepal is Rs. 100 (can vary based on the size of the company and its policy). At least, for now, you can buy most of the IPOs in Nepal at Rs.100 per share.
Nepal has been trying to adopt the book building system, but the security board has received a lot of scrutiny over this. Many small investors are concerned that the book building system will demotivate small investors, and the stock market will play into the hands of the wealthy and elite.
What is a Follow On Public Offering (FPO)
FPOs are similar to IPOs because they are also issued to raise capital for the company. However, FPOs are issued by established companies in the economy. A company may issue an FPO even though it may have already issued an IPO in the past. Hence for an intelligent investor, FPOs make a lot more sense than IPOs. The face value of an FPO is defined based on many factors. Among them are capitalized earnings, net worth per share (EPS), the average closing price of 180 days, and discounted cash flow.
I know these terms seem complicated. But I promise you they are quite easy to understand once you break them down. I will be explaining them individually in future posts. For now, all you need to understand is that FPOs are mostly sold at a higher price than IPOs.
How to open a brokerage account to start trading in the Nepalese Stock Market
When people think about the stock market, most think about the secondary market. The secondary market is where people can buy and sell stocks of companies listed on the Nepal Stock Exchange (NEPSE).
If you have already gone through all the steps we have discussed in the last post; then there is one more step you need to take before you start “trading” in the secondary market. You need a broker or a brokerage firm.
The choice of a broker for most will be based on convenience. Here is the list of brokers you can contact in order to create a Broker Id and start trading in the secondary market. Be sure to choose one with a good history and track record. If you are outside the Kathmandu valley, it will be hard for you to get a broker. But things have been changing, and brokers are now starting to open offices outside Kathmandu. Soon, banks may also have the ability to work as brokers. This will allow more people to take part in the stock market.
To get a broker Id all you will need is to fill a simple form, and you will be able to trade in the secondary market within a week or so.
In the next post, I will describe how buying and selling of stocks happen? What is the settlement period? How long do you have to wait to get the money after the sale?
- IPO is the issuance of shares to the public through which companies can raise money
- Par value of most IPOs is Rs 100 in Nepal until the book building system comes into effect.
- FPO is similar to IPO only difference being FPOs are issued by more established companies
- You need a broker id to start trading in the Nepalese stock exchange