What is a common stock and IPO ?

Hello !!

One way to make quick buck and beat inflation is to invest (We will define the difference between investing and speculating in a post later) in stock market. This is what you would hear people saying with most positive outlook towards life and the way they grow money. Then there is another bunch of people who would warn you and ask you to stay away from the stock market, as they feel you will lose all your hard earned money there, as it is a kind of gambling, where luck doesn’t favor the bravest. So what is a common stock ? It is nothing but a share in the business. Hence also known as equity share.

Whenever a company goes public (i.e. it goes out to public and ask them to give them money to expand/operate their business, in lieu of share in their business), it comes up with an IPO (Initial Public Offering). Based on the capital required, the company decides on how many shares/stocks they want to issue, and they put a price on it. The basic price of a share is called face value (in Indian terms it may be Rs 10, Rs 5, Rs. 1) and the company puts a premium on the face value. So if you see an IPO of XYZ Ltd. at 100 Rs. per share on a face value of Rs. 10, then it means the share has been allotted a premium of Rs. 90 per share, based on company discretion. Now it is up to the public to study the financials shared by the company and decide on whether they are willing to buy a share in the company by paying the premium over the face value. Once the share is allotted to the buyer, the buyer becomes a shareholder in the business. On a set date, the company stock gets listed on the stock exchange and the trading of stock begins.. A long journey of ups and downs..bulls and bears.

Note: I have tried to not to get into details of each topic, but to familiarize a novice to stock market investment. please share your views in the comment section.