Most companies issue IPOs in a frenzy of IPOs, one company after another. Have you ever wondered why this happens ? The companies take advantage of the situation that everyone will invest for listing gains. Have you done so? Investing just because it's A IPO? ﻿Many companies that are not able to borrow from the bank issue IPOs, probably as thier last resort. Why would banks not give them a loan ? Well, the reasons could be plenty. This IPO capital is know as RISK CAPITAL . Want to know more about this ? ... Go check out my ad-free blog for education,learning and financial literacy <a href="https://www.code-econ.in/2021/08/should-i-buy-ipos-no-here-is-why-my.html?m=1" rel="noopener noreferrer" target="_blank">Here</a> .

Here Is Why We Need To Stop Buying IPOs Right Now!!

<div>by</div><h2 dir="ltr"> Why we should stop the IPO hype</h2><h3>Here is my analysis comparing data from the past and looking at simple facts most investors tend to miss.</h3><img height="478" src="https://1.bp.blogspot.com/-4ijeuFaFhSQ/YRDMWLiplGI/AAAAAAAASDU/ephGhODgaO0XUFwOwklMzaUDQpRT-lNRgCLcBGAsYHQ/w640-h478/sdfghjkl%253B.jpg" width="640">IPO stands for an Initial Public Offering. It has come to light recently after almost every single company listed for an IPO makes a premier offering and the Investors get the dopamine rush they have been waiting for since time immemorial. IPOs are usually the start of a bear market, history and past IPOs all across the world have proven so. We will come to this at the end of this blog.&nbsp;&nbsp;Okay, let us figure out why do the companies bring out an IPO in the first place. They are much better off borrowing from the bank and a standard rate of interest. Why do they give a part of their ownership, their net profits, have an increased rate of giving up their profits? For the public and its benefit?&nbsp;HAHA HAHA!! Nope, the company never thinks this way. Here is the harsh truth my investor brothers. The companies take advantage of the fact that everyone is going to put their money in the IPO. It is&nbsp;a smart decision in my opinion, as everyone rushes to buy the IPO. The IPOs are always oversubscribed. This is because no one wants to miss a chance of gaining money, even if it will leave them having reduced capital in the future.&nbsp;Let's compare the different ways in which a company is able to borrow money&nbsp;The first and most obvious method the companies have used for centuries is by applying for loans to banks. The government usually gives most companies loans without much of a fuss. This is mainly to support the framework on which the banks are standing.&nbsp; Yes, that's right.&nbsp;You must be wondering how something as fundamental as not giving loans to the companies can shake the entire banking system. Right?&nbsp;Okay, so as many of you would know the bank is a part of a financial system. The main responsibility of a bank is to provide loans. Banks provide loans not only to companies but people as well. The amount a bank pays to a customer for the customer to keep its money in the bank is always less than the rate at which the bank gives the loan to the companies. Both pay interest on the loans, companies pay more interest and the people get less interest and vice versa. Basically, savings in any form would yield less interest as compared to when someone is taking a loan. Here is an example to help you understand&nbsp;Suppose person A deposits 5000 rupees in the bank. The Bank pays the person a rate of interest of 10%. Now, Company A needs a loan of 5000 rupees. The bank will provide company A with the loan at an amount greater than 10% say, 15%. The difference between these two interest rates is what the bank earns. The bank does not have money of its own and it will pay the money that the customer had deposited to the company. It is now the company's responsibility to pay the bank on time to ensure that the customers get their interest on time. If the company is not able to pay the interest on time then eventually the public will also not be able to get their money on time. this was a small situation, Imagine big companies like Reliance, Airtel and Kingfisher and they take money from the bank and they are not able to pay up.&nbsp;In case the company is not able to pay up on time to the bank. and the bank never received the money it means that the money of the public is lost. This is the reason why the public is really angry and annoyed when some company is not able to pay back as it was their money which was given to the company.&nbsp;In case the company is not able to pay up the money that it had borrowed from the bank, the government will come into play. The government will help the company in any way which way possible so that it can pay the bank on time. The government can provide some of its facilities which were initially really costly to the company for free so as to bring the company to a state where they are able to pay back the loan. The Government can also provide tax benefits directly in order to help increase the profit. To conclude the government will do anything it can in order to help the company to come into a state of profit or a state where they can pay back the loans.&nbsp;Taking money from the banks is the best way a company can gain access to money and it's really safe since the government will help the company out in any way possible to regain the money which was given by the bank as it belongs to the public.Now the second way in which a company can borrow funds is from the public directly. The process in which the company takes funds directly from the public and issue their shares for the first time in the markets is known as an IPO or the initial public offering. Company issue shares or a part of their ownership for the first time to the public so that the public can now become owners of the company, in return for some money which the public pay to the company. Now, this may look like a really easy method for the company to take funds from the public. However, on the contrary, It's the exact opposite. It is a long process for which the company has to go through various authorities and regulations in order to financially reach the public. Not only is it a long process but the company end up paying way more than it would have by taking a loan from the bank in the long term.&nbsp; One simple reason being that the company will now not have to pay interest but a part of its profits since the public is now its owners and the profit must be divided amongst all owners.&nbsp; If the profits increase, so would the amount the company has to pay. Consider this simple example: <h4>Assume that the company can borrow money from the bank at an interest rate of 10% and also has an option to issue shares for 10% of their ownership to the public as an IPO. Let's compare how much it would cost the company for a loan of amount 1lakh for 10 years with how much it cost the company for issues shares for 10% ownership of the company. Given its net profit is increasing at 10% p.a and Net profit for the first year is ( Using simple interest to make the calculations easier and more relatable.) Don't worry if this sounds a little complicated, The sheet will make it clear.</h4><img height="412" src="https://1.bp.blogspot.com/-jxYTkle7Goo/YQy8-osx0yI/AAAAAAAAR_E/k0sllFaY29wOp0LNH17HrS9VNTA41ZZfwCLcBGAsYHQ/w613-h412/Capture.PNG" width="613"><h3>&nbsp;Alright, the point is&nbsp;</h3><div>WHY WOULD A COMPANY PAY MORE IN ORDER TO GET NEARLY THE SAME AMOUNT OF MONEY? (Remember, companies don't care about us.)</div><div>An IPO does benefit the shareholders but it benefits the company the most. Here are the reasons why many companies have to go for an IPO. An IPO allows access to funds to a&nbsp; company if banks and venture capitalists are not allowing the company to take funds from them. This is known as risk capital. The reason why banks do not provide money to a company can be many.&nbsp; the bank may believe&nbsp; that&nbsp;</div><UL><LI>The company does not have the power to repay the amount that it is borrowing</LI><LI>You may belong to a risky industry and the bank cannot guarantee your company will survive</LI><LI>The company you are investing in may not have any assets to put as collateral.</LI><LI>The venture capitalists can not provide the funds for plenty of reasons all revolving around the fact that your company is not investable in or the valuation is too high. Remember this is usually the same valuation at which the IPOs come</LI><LI>Lastly and most importantly they should believe that you have a certain amount of cash flow or profits generated no one wants to give a loan to a company in losses or a company that would turn into losses</LI></UL><div dir="ltr">So this was when a company will have to come for an IPO in order to raise funds. But the IPOs are beneficial for the company as well in most cases. Companies come one after the other to issue their IPOs when the public is ready to invest all their money in IPOs and everyone wants the listing gains.&nbsp; it is in this situation that an IPO is oversubscribed. Now when it is oversubscribed the company has the right to issue the share at a premium price since everyone wants their hands on the share.</div><div>Many people argue that the money received by the company is constant and the pro-rata takes place.&nbsp; pro-rata is basically something that takes place during the oversubscription of the shares when the shares are divided in a certain ratio so as to give everyone a smaller proportion of what they applied for or a mix of the same, rejecting the shares and allocating in a certain ratio in order to deal with oversubscription. This is true let me explain with an example as to how the company can take advantage of this situation and make a tremendous amount of gains.</div><div>Imagine you are a company. You started working really hard. You gave it everything you had in the past 5 to 10 years and now you are heading to cash the benefits of your hard work. An IPO&nbsp; can be explained as an owner selling a part of their company to the public.&nbsp;</div><div dir="ltr">Now imagine another situation,&nbsp; you are a farmer and for the past ten years you have created a giant ball of rice. You now want to sell this giant bowl of rice. You go to the market and say " Hey I have come here to sell my giant ball of rice for the first time. Where can I find the people who want to buy my giant ball of rice" the agent replies " Hey come with me I will show you where you can sell this and find the right people"&nbsp; he takes you to a market where you can sell the rice ball for the first time. You had planned to sell your rice ball at around 100 rupees. As soon as you enter the market you see that everyone is behind your rice ball and you can't figure out why. You decide, okay, everyone is after my rice ball. I was initially going to sell it at 100 rupees but now I am going to sell it at 400 rupees because I am only going to sell 10% of my rice ball and I can get more profit if I sell at the higher price(It is what they call "PREMIUM" :)). Some people do manage to get the rice ball at the initial price of 100 rupees. They have a part of the rice ball which is less than 10% say even less than even 1%.</div><div dir="ltr">You are happy with that as you had planned to sell it at only a hundred rupees. On the subsequent day when the market is open to everyone, your rice ball is now worth 400 rupees and you have 90% of it. These people who had 10% of your rice ball will fight for these rice grains till the time they realize it was not worth it. Some would say "I'll&nbsp;pay&nbsp; 500 for this", some others 600, yet another guy would say "Oh I will just pay 1000 rupees for this". Remember you have most of the rice ball and they are fighting for just that 10% of the rice ball. Time passes by and everyone has a few grains of your rice ball. They sow your rice grains in order to get more rice grains. but what happens?&nbsp; You know your rice grains were worth less than 100 rupees.&nbsp; everyone who has sown your rice grains is now are expecting the return to be equal to or more than the amount they have paid.&nbsp; How is that possible! How can something which is worth so little give such an unexpected amount of gains? They now panic and go and sell all the remaining rice grains they had.&nbsp; This did not impact you much as you are continuing to make more and more rice balls. But what happened to those farmers who had purchased the rice grains at such a high price? They regret their greed.&nbsp;</div><div>Can you relate this situation of a farmer and you as a person in the share market?</div><div dir="ltr">Well don't worry and there is no need to feel sad. I have also invested in these IPOs for listing gains. There is nothing bad in doing so. But you must always be aware of what the true value of a company is in order to reap more benefits in the future. Always check the number of shares in the market and the market value of any company before investing.&nbsp;Yes, there is luck involved in the share market but remember it's luck, not a gamble. gambles are played without thinking.&nbsp;</div><div>I will be writing and another article on the history of how big IPOs have always Let The Crash of the share market. be sure to check that out in the feed.&nbsp;</div><div dir="ltr">
Tags
</div><UL><LI></LI></UL>

crypto

Cryptocurrency

Discover the world of business and economics.

economics

Economics

moneyandinvestments

Money & Investments

technologyandthefuture

Technology & The Future

startup

Startups

Here is my analysis comparing data from the past and looking at simple facts most investors tend to miss.

I PO stands for an Initial Public Offering. It has come to light recently after almost every single company l isted for an IPO makes a premier offering and the Investors get the dopamine rush they have been waiting for since time immemorial. IPOs are usually the start of a bear market, history and past IPOs all across the world have proven so. We will come to this at the end of this blog.

Okay, let us figure out why do the companies bring out an IPO in the first place. They are much better off borrowing from the bank and a standard rate of interest. Why do they give a part of their ownership, their net profits, have an increased rate of giving up their profits? For the public and its benefit?

HAHA HAHA!! Nope, the company never thinks this way. Here is the harsh truth my investor brothers. The companies take advantage of the fact that everyone is going to put their money in the IPO. It is a smart decision in my opinion, as everyone rushes to buy the IPO. The IPOs are always oversubscribed. This is because no one wants to miss a chance of gaining money, even if it will leave them having reduced capital in the future.

Let's compare the different ways in which a company is able to borrow money

The first and most obvious method the companies have used for centuries is by applying for loans to banks. The government usually gives most companies loans without much of a fuss. This is mainly to support the framework on which the banks are standing.  Yes, that's right.

You must be wondering how something as fundamental as not giving loans to the companies can shake the entire banking system. Right?

Okay, so as many of you would know the bank is a part of a financial system. The main responsibility of a bank is to provide loans. Banks provide loans not only to companies but people as well. The amount a bank pays to a customer for the customer to keep its money in the bank is always less than the rate at which the bank gives the loan to the companies. Both pay interest on the loans, companies pay more interest and the people get less interest and vice versa. Basically, savings in any form would yield less interest as compared to when someone is taking a loan. Here is an example to help you understand

Suppose person A deposits 5000 rupees in the bank. The Bank pays the person a rate of interest of 10%. Now, Company A needs a loan of 5000 rupees. The bank will provide company A with the loan at an amount greater than 10% say, 15%. The difference between these two interest rates is what the bank earns. The bank does not have money of its own and it will pay the money that the customer had deposited to the company. It is now the company's responsibility to pay the bank on time to ensure that the customers get their interest on time. If the company is not able to pay the interest on time then eventually the public will also not be able to get their money on time. this was a small situation, Imagine big companies like Reliance, Airtel and Kingfisher and they take money from the bank and they are not able to pay up.  In case the company is not able to pay up on time to the bank. and the bank never received the money it means that the money of the public is lost. This is the reason why the public is really angry and annoyed when some company is not able to pay back as it was their money which was given to the company.

In case the company is not able to pay up the money that it had borrowed from the bank, the government will come into play. The government will help the company in any way which way possible so that it can pay the bank on time. The government can provide some of its facilities which were initially really costly to the company for free so as to bring the company to a state where they are able to pay back the loan. The Government can also provide tax benefits directly in order to help increase the profit. To conclude the government will do anything it can in order to help the company to come into a state of profit or a state where they can pay back the loans.  Taking money from the banks is the best way a company can gain access to money and it's really safe since the government will help the company out in any way possible to regain the money which was given by the bank as it belongs to the public.

Now the second way in which a company can borrow funds is from the public directly. The process in which the company takes funds directly from the public and issue their shares for the first time in the markets is known as an IPO or the initial public offering. Company issue shares or a part of their ownership for the first time to the public so that the public can now become owners of the company, in return for some money which the public pay to the company. Now, this may look like a really easy method for the company to take funds from the public. However, on the contrary, It's the exact opposite. It is a long process for which the company has to go through various authorities and regulations in order to financially reach the public. Not only is it a long process but the company end up paying way more than it would have by taking a loan from the bank in the long term.

One simple reason being that the company will now not have to pay interest but a part of its profits since the public is now its owners and the profit must be divided amongst all owners.   If the profits increase, so would the amount the company has to pay. Consider this simple example:

Assume that the company can borrow money from the bank at an interest rate of 10% and also has an option to issue shares for 10% of their ownership to the public as an IPO. Let's compare how much it would cost the company for a loan of amount 1lakh for 10 years with how much it cost the company for issues shares for 10% ownership of the company. Given its net profit is increasing at 10% p.a and Net profit for the first year is ( Using simple interest to make the calculations easier and more relatable.) Don't worry if this sounds a little complicated, The sheet will make it clear.

<ul><li>The company does not have the power to repay the amount that it is borrowing </li><li>You may belong to a risky industry and the bank cannot guarantee your company will survive </li><li>The company you are investing in may not have any assets to put as collateral. </li><li>The venture capitalists can not provide the funds for plenty of reasons all revolving around the fact that your company is not investable in or the valuation is too high. Remember this is usually the same valuation at which the IPOs come </li><li>Lastly and most importantly they should believe that you have a certain amount of cash flow or profits generated no one wants to give a loan to a company in losses or a company that would turn into losses </li> </ul>

Imagine you are a company. You started working really hard. You gave it everything you had in the past 5 to 10 years and now you are heading to cash the benefits of your hard work. An IPO  can be explained as an owner selling a part of their company to the public.

They regret their greed.

Should I buy IPOs ? No. Here is why. My views #1

Here Is Why We Need To Stop Buying IPOs Right Now!!

Related collections

Other curated ideas on this topic: