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https://www.kotaksecurities.com/derivatives/options-strategies-all-you-need-to-know/

Essential Option Trading Strategies for Every Trader in Stock Market

In options trading, investors have to decide if they want to execute the contract. So, options trading strategies play a critical role in making appropriate decisions. Therefore, having a thorough grasp of options trading methods is essential. There are several strategies to tradeoptions. Each of these strategies has different risks and benefits associated with them. Let’s discuss the commonly used options trading strategies in this post.Key HighlightsOptions are financial contracts that give the right but not the obligation to buy the underlying assets at a fixed price on a future date. These assets can be stocks, bonds, ETFs, etc.Options trading strategies are critical to trade options. They consider several factors like asset volatility, market trends, and various risk indicators.Options trading strategies are mainly categorised into bullish, bearish, and neutral strategies.Bullish strategies include bull call spread, bull put spread, synthetic long call, long straddle, long strangle, and long call butterfly.The bear call spread, bear put spread, protective call, covered put, short straddle, short strangle, and short call butterfly are bearish strategies.Examples of neutral options trading strategies are long call, short call, long put, short put, covered call, and collar.Bullish Option Trading StrategiesStrategy 1: Bull Call Spread StrategyHere, you can buy ‘in the money' call option and sell in the ‘out of the money' option. However, both options must have the same expiration date.Strategy 2: Bull Put Spread StrategyHere, you can protect the downside of the put by buying another put (at a lower strike rate). This acts as an insurance for the put sold. If the value of the underlying asset rises, both puts expire, and you are only left with the premium. Therefore, you only gain from the bull market condition. Did you know: Kotak Securities offers stock research insights for traders.Strategy 3: Synthetic Long Call: Buy Stock, Buy PutThis is a conservative bull-market strategy. You may start out with a gut feeling that the markets are going to rise, but what if the prices fall? During this time, you will have to insure against your losses. You can do this by buying a put option. As discussed earlier, the put option gives you the right to sell the underlying stock at a pre-agreed strike price. In synthetic long call options, your strike price can be the price at which you bought the stock or a rate slightly below that. Since you are buying the put option, that acts as a hedge.Strategy 4: Long ComboHere, you sell a put and buy a call. This is a bull market strategy, i.e. you are expecting the markets to march north. In the long combo strategy, you sell the right to sell (put) at the OTM and buy the right to buy (call) at a higher strike rate OTM. This strategy starts making profits as the price of the underlying asset rises.Strategy 5: Long StraddleA straddle is a volatility strategy. Usually, it is used when you expect markets to show rapid movements. Here, you buy a call as well as a put for the same strike price and maturity date. By this, you can make the most when markets move in either direction. If the price of the stock/index increase, you can exercise your call option, while letting your put option expires. However, if the price falls, the put option can be exercised while the call option expires. In either case, you gain profit.Strategy 6: Long StrangleLong strangle is the cheaper version of the long straddle options strategy. Here, you buy a slightly OTM put and a slightly OTM call of the same underlying asset with the same expiration date. This is also a direction-neutral options strategy. However, in a long strangle, you require a higher movement on both sides to gain from the strategy. Therefore, a high level of volatility is required to exercise it.Strategy 7: Long Call ButterflyThis options strategy can be exercised only when you are expecting the underlying asset to experience very minor price movements. The maximum reward in a long call butterfly is restricted, and gains occur only when the asset price is in the middle of the range at expiration.Bearish Option Trading StrategiesStrategy 1: Bear Call Spread StrategyThis is the opposite of the bull call spread strategy. It is used when markets are either range-bound or marching south. Here, you sell the ITM call and buy the OTM call. You protect the downside of the call option sold by buying another call option of a higher strike price to insure the downfall.Risk:The maximum loss is the difference between the two strike rates minus the net credit received.Strategy 2: Bear Put Spread StrategyA bear put spread strategy requires you to buy put and sell put. You buy a higher ITM put and sell a lower OTM put option. Thus, your net debit is created. However, you can gain only when the stock/index falls. The puts are bought to cap the asset downside. The sold puts will reduce your investment cost.Strategy 3: Protective CallThis strategy is also called the synthetic long put options strategy. When you buy a call just to hedge, it is called the protective call strategy. When you choose the opposite position in a strategy just to avoid/reduce losses from one of the moves is called hedging. The best example of hedging is insurance. You hedge for the market upside while retaining your downside profit potential.Strategy 4: Covered PutEarlier in the piece, we had discussed how covered calls can protect your portfolio from downside risk. The covered put is just the opposite of the covered call strategy. You can use this strategy during neutral to bullish market conditions. Here, you can sell yourput optionduring OTM conditions (when your strike price for the asset is higher than the market price of the asset). Selling the put means selling your right to sell.Strategy 5: Short StraddleThis strategy is the opposite of the long straddle. If you feel that there is no substantial movement going to be experienced in the short run, you can go for the short straddle. You can sell the call and the put for the same asset, at the same strike price, for the same expiration date. However, if the markets move significantly in either direction, your losses can be enormous. To gain from the short straddle, your underlying asset value should be close to your strike price before the expiration date.Strategy 6: Short StrangleThe short strangle strategy is similar to the short straddle strategy. It increases your benefits as the buyer of your option gets the least chance to exercise the option. Here, you sell a slightly OTM call and a slightly OTM put for the same option at the same strike rate and expiration date. The underlying asset price has to move significantly for the buyer of the option to exercise it. If the asset does not exhibit much movement, you get to keep the premium. Risk: You can face unlimited risk if the markets experience rapid movements.Strategy 7: Short Call ButterflyHere you buy 2 ATM call options, sell one ITM call option, and one OTM call option. Unlike the long call butterfly, it is for volatile markets. You will gain if there is a substantial rise in the index/stock. However, if there's a minor change in the underlying asset value during expiration, you will lose.Strategy 8: Long Put CondorThis strategy is very similar to the long butterfly strategy. The difference is that the two ATM options sold have different strike rates, and the profitable area is wider than that of the long butterfly.Strategy 9: Short Put CondorThis strategy is very similar to the short butterfly strategy. The only difference is that the two middle-bought options have different strike rates.Neutral Option Trading StrategiesStrategy 1: Long Call:If you are bullish about the stock performance, you can go for the long call. In simple terms, when you are positive about the growth of the stock price you have invested in, you can buy your right to buy (Call Option) to maximise your profit.As discussed earlier, ‘call' is your right to buy. Here, you buy a ‘call' option after predicting that the market price of the underlying aster will rise above your strike price before the option expires. That is one of the most basic options strategies.Strategy 2: Short CallYou can use this options strategy during bear market conditions. In a call option, you buy a call in case of a bull market, and during a bear market, you sell the call. This strategy involves unlimited risk. Therefore, a short call must be bought with utmost caution. This strategy is easy to execute. However, your reward is only limited to the premium. Here, you do not own the stock. Therefore, it is also called a ‘short naked call'.Strategy 3: Long PutAs discussed earlier, the put option is the opposite of the call option. This is a bear market strategy and is used to limit risk from falling market conditions. When you buy put, you benefit from the bear market and limit your risk to the premium paid for buying the option. In a long put, your profit potential is unlimited.Strategy 4: Short PutHere, you sell a put option instead of buying it. You can sell the put when markets are bearish and can buy it during bull market conditions. Selling a put during market upswings helps you gain from the rising markets. By selling your put option, you have sold your right to sell the stock at your pre-agreed strike price.If the price of the underlying asset rises above its strike price (during the market condition), the short put position will give you profit from the premium. This is because the buyer of the put option will not be able to exercise it. However, when the price of your underlying asset falls below your premium, you will face losses. The potential loss during the short put is unlimited.Strategy 6: Covered CallThis strategy is for neutral to moderately bullish market conditions. If you own an asset whose price you expect to rise in the long term but stay bearish in the short run, you can go for a covered call. Here, you sell your right to buy for the stock you own. You can only exercise this option during the OTM conditions (the strike price of the underlying asset is greater than its market price). Until then, you can retain your premium. Since you sell (write) the call option after buying, it is also called the ‘buy-write strategy'.Strategy 7: CollarThis strategy is quite similar to the covered call. However, there's a slight twist. Here, you further limit the covered call risk by buying a put to cover the downside and then finance the put by selling a call. Generally, put and calls are an OTM (Out of the Money). Both of these strategies should have the same expiration date, along with an equal number of shares. When the put limits your risk, the call also limits your gains. Therefore, it is a low-risk, low-reward options strategy.There are several options trading strategies available for different market conditions. However, the core of this financial instrument is the same. Since it is an option, you have a choice of exercising it or not exercising it. This is unlike stocks, where you either buy or sell the asset. Through options strategies, you only trade the right to buy or sell. Options revolve around the world of ‘call' and ‘put'. Therefore, to gain maximum benefits, you must use them well. Options strategies can be a good approach for smart investing.Intraday Option Trading StrategiesThe following are some useful strategies for intraday options trading.Strategy 1: Momentum StrategyThe strategy tries to profit from the market momentum. This entails monitoring the appropriate equities before a notable shift in the market trend occurs. Traders purchase or sell securities in response to this trend change. They consider a number of factors, including the most recent news, takeover announcements, quarterly profits, etc.Intraday traders must review news related to the companies they have on their watchlist. There are several external factors influencing the share prices. So, intraday traders need to respond quickly in order to generate profits. The market's momentum determines the length of time an individual holds an asset.Strategy 2: Breakout StrategyTime is an important factor when purchasing and selling shares on the same day. This intraday trading approach aims to identify equities that have moved outside their typical trading range. One must spot equities entering a new price range. In other words, traders must identify the threshold limits at which share prices rise or fall. They may acquire shares and initiate long positions if the stock prices are above the predetermined level. If stock prices go below this level, you should sell the shares or consider taking on short positions.Strategy 3: Reversal StrategyThere is a significant risk involved with this trading method. It entails calculations and analysis to trade against the market trends. The intraday trading approach is more challenging than the others. This is because you must possess in-depth market expertise. Moreover, it might be difficult to identify the price pullbacks and strengths precisely.Strategy 4: Scalping StrategyScalping allows you to profit from small price fluctuations. This method is typically used for high-frequency trading. A complete technical or fundamental setup is not necessary here. Instead, price action is more important while using a scalping method. You must ensure that the equities they select are volatile and liquid. Also, use a stop loss for each order.Strategy 5: Moving Average Crossover StrategyA shift in momentum is indicated when the prices of an asset go above or below the moving average. An uptrend occurs when prices surpass the moving average. Conversely, a downtrend occurs when prices fall below the moving average. Experts advise taking long positions or purchasing equities during an upswing. You may sell the shares or take short positions during downtrends.Strategy 6: Gap and Go StrategyA key component of the gap-and-go strategy is identifying companies with minimal pre-market trading volume. Their beginning price differs from their closing price from yesterday. When a stock opens higher than it closed the previous day, it is known as a gap-up. On the other hand, the opposite situation is referred to as a gap down. Traders who use this strategy expect the gap to narrow before the trading day ends.Read More:5 things to know about Margin CallsWhy do stock prices move up and down?7 things that are moving marketsA dummy’s guide to Proxy Advisory Firms FAQs on Options StrategiesWhich strategy is best for options trading?The best strategy varies based on trading objectives. Popular ones include covered calls and spreads. Always look to align your strategy with risk tolerance and market outlook for optimal results.Which is the easiest option strategy?Covered calls, owning stock, and selling calls, are some easy options trading strategies. They are considered beginner-friendly. However, the potential profits are limited.Which is the riskiest options strategy?Strategies like selling naked options, especially the puts, carry high risk. The potential for losses is unlimited, making it one of the riskiest strategies.What are the least risky options strategy?Protective puts and covered calls with defined risk are among the least risky strategies. The potential losses in these strategies are limited.What is the best strategy for options buying?Long call or put options allow for significant profit potential with limited risk. Ideal for expressing a bullish or bearish view.What is the safest options strategy?Strategies with limited risks, like covered calls or protective puts, are considered safer. Tailor an approach to match your risk tolerance.How do I start trading options for beginners?Begin by understanding the basics. Learn the strategies and practice with virtual trading platforms. Gradually implement actual trades as you become confident.

https://www.kotaksecurities.com/futures-and-options/what-is-open-interest-in-the-share-market/

What is Open Interest?

Key HighlightsThe total number of active contracts that are not yet closed or resolved is known as open interest.The open interest will rise when a new buyer and seller sign a contract. It will decline if contracts are closed or executed. But open interest doesn't change when a new buyer and an old seller sign a contract.The open interest to volume ratio shows that open interest and volume are not the same. Open interest is a running tally of the active contracts. Whereas, volume is the total number of contracts exchanged in a given time frame.To gain a deeper understanding of money movement in the stock market, traders and investors can utilise open interest along with other indicators such as price and trading volume.Open Interest Meaning in Share Market"Open interest" refers to the total number of open contracts market participants hold after a day. It can also be referred to as the overall number of futures or option contracts that still need to be executed, expired, or completed by delivery.In particular, open interest applies to the futures market. Open interest, or the total number of open contracts on the security, is often used to confirm trend reversals infutures and options contracts. Money flows into the futures market are measured as "open interest." There must be a buyer of that contract for each seller of a futures contract. Thus, only one contract is created by the seller and buyer.Therefore, we need only know the totals from one side or the other, buyers or sellers, not the sum of both, to determine the total open interest in any given market. The number of contracts on a day shall be shown as an increase or decrease in the Open Interest position, which is notified each day and will be presented positively or negatively.How To Calculate Open InterestOpen interest is calculated for a specific derivative contract by summing up the total number of long and shortbuy and sell contracts. There are long-side buyers and short-side sellers in every futures or options contract. Open interest will increase when a new contract is entered into between the purchaser and the seller. Open interest shall be reduced by one when an existing contract is replaced by the seller's and buyer's closing of positions.Using Open Interest For TradingThere are some key principles to use the open interest. The following table illustrates them. PriceRisingVolumeUpOpen InterestIncreaseMarketBullishPriceRisingVolumeDownOpen InterestDecreaseMarketBearishPriceDecreasingVolumeUpOpen InterestDecreaseMarketBullishPriceDecreasingVolumeDownOpen InterestIncreaseMarketBearishPriceVolumeOpen InterestMarketRisingUpIncreaseBullishRisingDownDecreaseBearishDecreasingUpDecreaseBullishDecreasingDownIncreaseBearish Technical experts believe that the trend will continue as long as there is a high level of bullish sentiment and more traders are opening new contracts the open interest will rise. Technical analysts conclude that a trend is waning when the price rises and open interest falls. A declining open interest is a sign that traders are getting rid of their positions. Technical analysts deduce that a trend is weak when the price falls and the open interest value rises. Traders usually think that the particular trend is strengthening and will reverse when the price and open interest decline.Working of Open InterestOpen interest is used to estimate the amount of money coming into or going out of a futures or options market is estimated by. A rise in open interest indicates fresh money entering the market. Whereas, a fall in open interest indicates money leaving the market. It provides information on an option's liquidity. So, it is very crucial for options traders.Example of Open InterestConsider an example of calculating open interest on futures contracts, the common area where open interest can be applied.Example:Suppose you follow a futures contract for "XYZ" in thestock market. There are 100 shares of Stock XYZ for each futures contract.Let us calculate the open interest for each day:Day 1:The purchase of Trader A increases open interest by 5 contracts.3 contracts have been taken off the Open Interest by Trader B's sale.Open interest on Day 1 is (5 - 3) = 2 contracts.Day 2:The purchase of trader C has resulted in 2 contracts being opened for interest.The sale by trader A results in a reduction of 1 contract's outstanding interest.Open interest on Day 2 is (2 - 1) = 1 contract.Day 3:4 open interest contracts are added to Trader D's purchase.Open interest is multiplied by 2 contracts when trader B buys to cover his short position.Open interest on Day 3 is (4 + 2) = 6 contracts.So, theopen interestfor the Stock XYZ futures contract is 2 contracts on Day 1, 1 on Day 2, and 6 on Day 3. An open interest is helpful for understanding the level of liquidity on the market. Greater open interest will make it easier to trade and exit at competitive bidding or asking rates, because the market is more liquid.Open Interest and VolumeIn the futures market, open interest and volume are the two key ideas. Investors use both these indicators to forecast trends. They are some common aspects. However, OI and volume are not the same.Open interest indicates the quantity of open contracts held by individual buyers and sellers in the futures market. In this market, a buyer should exist for each contract that is sold. Thus, the total number of contracts that are transacted during the day stays balanced. Volume is the total number of contracts that are completed in a given day. Thus, if one contract is purchased and sold, the volume increases by one.The volume is set at zero when the day starts. As a result, you are able to see exactly how many contracts are traded during trading hours. Compared to volume, open interest is more easily visible. Depending on how many traders enter or leave the deal, the open interest value may or may not change.Let's use an example to understand this better. Assume that A, B, and C are the three traders present in the market. Buyer A purchases all the 10 futures contracts that Seller B sells on the first day. Thus, following the first day, open interest and volume were both 10.The next day, C purchases 7 contracts and A sells 7. When the second day ends, the volume changes to 7 (the number of contracts that were exchanged). However, open interest stays at 10 since the market did not produce any new contracts.It is vital to remember that open interest may fluctuate for days,. Whereas, volume varies every day. Until new contracts are started or the existing ones are settled or executed, open interest will stay the same.Importance of Open InterestOpen interest is used to measure market activity. There are no openings, or nearly all positions are closed because of little or no open interest. High open interest means several contracts remain negotiated, and market participants will pay close attention to these markets.Open interest refers to money flowing into or out of a futures or options market. Open interest refers to new or additional money that comes into the market, while lower open interest indicates outflows from the market. Open interest is essential tooptions tradersas it provides vital information on option liquidity.Benefits of Monitoring Open InterestOpen interest has several benefits. You can monitor and know different changes in the stock market. Evaluate Open interest to gain & take different advantages which are as follows:New funds flow to the market as open interest increases. This will lead to the continuation of the current upward, downward, or sideways trend.The decrease in open interest shows the market's decline and indicates that the price trend has ended. In particular, open-interest knowledge can be helpful in reaching the end of significant market movements.After a prolonged price gain, a leveling off of open interest is frequently a sign that an uptrend or bull market is ending.ConclusionOpen interest is the total number of open derivative contracts that have not yet been settled. They are still not used, finished, or run out. This measure is linked to the options and futures markets rather than the stock market. Instead of adding up all of the transactions between buyers and sellers, open interest is based on the total number of open contracts. Open interest is typically not used as a trend or price movement indicator. If you plan to keep taking steps into futures and options trading, go ahead with the Kotak Securities app and get tons of tools & insight on stock market trading. FAQs on Open Interest in Share MarketWhat does open interest indicate?Open interest is a measure of market participation. An increasing open interest indicates additional money is coming in to the market which suggests that the trend is strong. Conversely, a decreasing open interest may signal that the market sentiment is becoming weak.What is the highest open interest?Highest open interest is often observed at a specific strike price. This strike price is termed as the "max pain" point. It represents the level where an option writer would have lowest possible losses.How does open interest affect stock price?The market weakens if prices rise, volumes fall, and Open Interest declines. However, if prices fall and volumes and open interest rise, the market is weak; if prices fall and open interest fall, the market gains strength.Is higher open interest good?The greater the open interest and the volume, the better the liquidity and the more efficient the pricing. The trading volume shall be set daily, and the opening interest shall remain constant for the duration of the option.What if the call OI is high?Generally speaking, when the open interest in calls is higher than the open interest in puts, there is a higher bullish trend in the market.What is open interest for intraday?Open interest is essential forintraday tradersbecause it can indicate the level of interest in a particular security. The high level of open interest indicates that many traders are concerned about the security, which could cause more volatility and price movements.What happens if open interest is zero?In case of zero open interest there will be no contracts open or available When the interest of any strike price is zero.

https://www.kotaksecurities.com/articles/is-indias-sip-revolution-finally-here/

Is India’s SIP Revolution Finally Here?

Kotak Insights | Date 01/12/2023Ever wondered how a seemingly straightforward investment plan could set off a financial revolution?Picture this: a nation collectively investing, building wealth, and reshaping its financial destiny.Well, it’s happening, and one of the catalyst for this change is the era ofSystematic Investment Plans (SIPs)in India.In the vast landscape of India's financial markets, SIPs have emerged as unsung heroes, not just making headlines but rewriting financial norms.Let us explore this in more detail.Unboxing the NumbersFrom March 2020 to September 2023, the Assets Under Management (AUM) in the Indian mutual fund industry surged from Rs 22 lakh crore to a staggering Rs 48 lakh crore. [Start SIP in mutual funds by clicking here]But what adds spice to this unprecedented growth is understanding where it’s coming from.Enter the dichotomy between T30 and B30 cities.SIPs in T30 versus B30First, let’s break down the acronyms.T30refers to the top 30 geographical locations in India, whileB30includes locations beyond the top 30.The significance of this city-level segregation of mutual fund AUM is made by Association of Mutual Funds in India (AMFI) is that the market regulator wants the mutual fund industry to work towards increasing the penetration of mutual funds across India and not just in large cities.So, the B30 Cities (cities beyond the top 30 cities) are put in a separate bucket and have their own B30 Commission Rules of Mutual Funds.And how are the B30 locations performing? Impressively, as the numbers say!Mutual funds are witnessinghigher growthin new SIPs accounts in rural areas, outpacing the growth in T30 cities.Between May and October 2023, the SIP flows from B30 have increased by 26% to Rs 6,436 crore, compared to a 22% growth in T30.Active SIP accounts from B30 outpaced the T30 tally, surging 17% from 31.7 million at the end of April 2023 to 37.3 million at the end of October.What has led to this surge?It’s therising awarenessandgrowing acceptanceof new-age investment options.While these B30 locations are likely to see more penetration, they also need more inflow of funds.This is because of the low ticket size in investing.Investors from B30 contributedRs 1,725on average to mutual funds through SIPs, which is 70% lower than theaverage ticket sizeof T30 investors atRs 2,940.In the B30 itself, the average ticket size in November 2021 stood higher at Rs 1,757 compare to Rs 1,725 in October 2023.All in all, smaller towns are drawing more mutual fund attention due to their higher scope for growth. But to keep this momentum, there should be more inflow of funds into these areas in the coming time.A Shift In The MakingSIPs are evolving from regular transactions to strategic financial victories.In FY24, SIPs crossed the Rs 1 trillion mark.Zoom in on the canvas, and you’ll see small towns leading the financial charge. In the past year, fund houses opened up numerous branches in these smaller areas.The surge in these corners isn’t just a blip; it’s a change in culture, a shift in how India is managing finances.Beyond Mutual FundsSIPs aren’t only about mutual funds; they've elegantly stepped into the stock market.Operating similarly to mutual fund SIPs,stock SIPsallow regular investments in a chosen stock, sans the fund manager or a mutual fund.So, there’s no fund manager or a fund you’re investing in but a stock where you average out your investment over a long time.Imagine building your stock portfolio without the stress of market timing—an investor's dream.You can invest in stock SIPs byclicking here.ConclusionSIPs emerge not just as investment tools but as the architects of a financial transformation.Every SIP investment adds a stroke to India’s dynamic financial evolution.It's not just about numbers; it's about cities crafting a story, and SIPs becoming the heartbeat in a financial revolution.Are you ready to unravel the SIP revolution?Step into the financial arena, where every investment paints a piece of a larger, pulsating story.By the way, if you’ve ever wondered how long a Rs 50,000 SIP will take to reach the target corpus if you want to buy aMercedes-Benz?Watch this video to know more.Until next time…Stay Tuned!Sources:Kotak Securities, AMFI, Economic TimesDisclaimer:This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read thefull disclaimer here.

https://www.kotaksecurities.com/ipos/ipo-process-explained-9-easy-steps/

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For a business that has decided to go public, the road to launching an IPO is a long and lonely one. Typically, an IPO process takes six to nine months. The following outline should give you an idea of all the steps involved:The IPO ProcessStep1: Appointment of investment bankers/underwritersThese financial experts carry out the IPO process on behalf of the company. They act as intermediaries between the company and the investors.Step 2: Registration for IPOThe investment bank and the company prepare a registration statement and a draft prospectus. Known as the red herring prospectus (RHP), it is the most important document that a retail investor has access to and can use to evaluate the offer. The document details all the information about the business, with the exception of price or quantum of shares being offered. All businesses have to submit the red herring prospectus. According to Section 32 of the Companies Act:The company offering an IPO needs to submit the Red Herring Prospectus with the Registrar of Companies at least 3 days before the offer is opened to the public for bidding.All the obligations that the company’s prospectus will have, should also be contained in the RHP. Any variations between the two will have to be highlighted and be duly approved by SEBI and ROC.Once the IPO bidding is closed, the company has to submit the final prospectus to both ROC and SEBI. This should contain both the quantum of shares being allotted and the final issue price on which the sale is closed.The RHP is the document that the issuer and the underwriters use to market the IPO with. It is the most important tool that a retail investor has access to and can use to evaluate the offer. The document contains all the financial and other information about the company. All the mandatory disclosures that SEBI and the Companies Act are collated in this document as well. The sections include:Definitions: All the important issues and industry specific keywords are defined in this section. If you are analyzing an offer from an industry you are already familiar with, this section may not warrant a close reading.Risk Factors: Every business faces risks and uncertainties.This section is meant to disclose every possibility that could have a material impact on company’s performance post listing, and the share price.Use of Proceeds: This is probably the most important section of the prospectus. This gives the investors information about where the money raised through the IPO will be used. This is a good indicator of the direction the business will develop in, and proxy for how well the finances are being handled by the company.Industry Description: This section provides forecasts and predictions about the larger industry the company operates in.Business Description: This section talks about the core activities that the company carries out. It describes how the company generates profits. Investors pay close attention to this, as it describes what they will end up owning, if they get the shares of the company.Management: Details about the promoters, directors and key management personnel is provided in this section. Investment in a new company is largely an investment in the management team’s competency. Therefore, investors read this section with interest and gather whatever information they can about the people behind the company.Financial Information: This section contains auditor’s reports and the financial statements of the company for the previous 5 years.Legal and Other Information: All litigations filed against the company or a promoter or a director which are not yet settled are listed in this section.Step 3: Cooling-off periodThis is the time when SEBI verifies the facts disclosed by the company. It looks for errors, omissions, and discrepancies. Only after SEBI approves the application can the company set a date for the IPO.Step 4: Application to stock exchangeThe company files an application with the stock exchange where it plans to float the initial issue.Step 5: Creating a buzzCompanies need to ensure that the IPO is a big-ticket event, much like how summer Hollywood blockbusters or the Khan tentpole movies are. One way to spread the excitement in the investor circles is through the IPO road show. Upon getting approval for an IPO, the investment bankers and underwriters hired by the business get into action. They travel to important finance destinations around the world to showcase the IPO offer. Since they literally ‘take to the road’, the name ‘road show’ has stuck.The TimingRoad shows are organised much before the IPO date. This gives investors time to decide how much to invest. Typically, the timeline is like this:When a company decides to go public, it employs one or more teams of investment bankers or underwriters. These teams help the company to carry out the IPO process.Upon getting approval from the market regulator, the date for floating the IPO is set.Following this, a financial prospectus is released.Soon after, the investment bankers, underwriters, and company management set out on the road shows.The ProcessRoad shows are used to convince investors about the potential of the company. They highlight the future growth trajectory of the business as well as the expected market share. The teams responsible for the road shows also meet with business analysts and fund managers. Such professionals may offer insights that enhance the company’s IPO process. Company executives provide every detail about the IPO through multimedia presentations, Q&A sessions, and other user-friendly means. Increasingly, companies are posting online versions of road shows which any individual can access. To help out investors, companies may also arrange small group meetings a few days or weeks before floating the IPO.Step 6There are two types of IPO processes. They are:Fixed price issueBook building issueIn a fixed price issue, the price at which shares will be sold and allotted is made known to the investors in advance. Whereas, in a book building issue, the issuer offers a 20% range within which investors can bid for the shares. The final price is decided only after the bidding is closed. This 20% range is called an IPO price band. Both retail and institutional buyers are called to submit their bids within this price range. The book, that is the collection of bids that have come in for the IPO, is open to all investors. In other words, the demand for the shares offered at various prices is available for all current and potential investors. No bid price can be less than the IPO floor price, which is the lower bound of the band. Neither can it be higher than the IPO cap price, the upper bound of the band. The book is normally open for 3 days, and the bidders can revise their bids as long as the book is open. Issuers prefer book building issues over fixed price issues as the process gives them the opportunity to discover the price and demand. This way, the issuer is able to ensure that the issue generates as much value as the market is willing to provide. The price at which the issue is finally sold is called the cut-off price. This is the highest price at which all the shares offered can be sold.Step 7This is the last step before an IPO is launched.. Businesses also ensure that company insiders (internal investors) don’t trade in the IPO. That’s because:It helps stabilise the market without additional selling pressure from insiders. It prevents corrupt executives from pawning off overpriced shares at the expense of general buyers. It protects retail investors from a manipulated offer price of the shares. It stops the market from being flooded with too many shares that might disturb the natural demand–supply balance.Step 8Finally, the issues are sold on the primary market and the money is collected from the investors. The bidding period is usually about five working days.Step 9The IPO shares are allotted to bidders within 10 days of the last date of bidding. In case the IPO is oversubscribed, the shares are allotted proportionately to the applicants. For example, suppose the oversubscription is four times the allotted number of shares. Then an application for 10 lakh shares will be allotted only 2.5 lakh shares.A Quick RecapThe IPO jamboree is a months-long process. It requires the company to put on a charm offensive, launch ad blitzes, do exhaustive paperwork, solve insurmountable problems, ceaseless number-crunching and endless legwork.Read More:Allied Blenders and Distillers IpoVraj Iron and Steel Ipo