What is Floating Stock?

 

What Is Floating Stock?

Floating stock is the number of shares available for trading of a particular stock. Low float stocks are those with a low number of shares. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares.

Closely-held shares are those owned by insiders, major shareholders, and employees. Restricted stock refers to insider shares that cannot be traded because of a temporary restriction, such as the lock-up period after an initial public offering (IPO).

A stock with a small float will generally be more volatile than a stock with a large float. This is because, with fewer shares available, it may be harder to find a buyer or seller. This results in larger spreads and often lower volume.

Understanding Floating Stock

A company may have a large number of shares outstanding, but limited floating stock. For example, assume a company has 50 million shares outstanding. Of that 50 million shares, large institutions own 35 million shares, management and insiders own 5 million, and the employee stock ownership plan (ESOP) holds 2 million shares. Floating stock is therefore only 8 million shares (50 million shares minus 42 million shares), or 16% of the outstanding shares.

The amount of a company’s floating stock may rise or fall over time. This can occur for a variety of reasons. For example, a company may sell additional shares to raise more capital, which then increases the floating stock. If restricted or closely-held shares become available, then the floating stock will also increase.

On the flip side, if a company decides to implement a share buyback, then the number of outstanding shares will decrease. In this case, the floating shares as a percentage of outstanding stock will also go down. 

 A stock split will increase floating shares, while a reverse stock split decreases float.

Why Floating Stock Is Important

A company's float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. Low float is typically an impediment to active trading. This lack of trading activity can make it difficult for investors to enter or exit positions in stocks that have limited float.

Institutional investors will often avoid trading in companies with smaller floats because there are fewer shares to trade, thus leading to limited liquidity and wider bid-ask spreads. Instead, institutional investors (such as mutual funds, pension funds, and insurance companies) that buy large blocks of stock will look to invest in companies with a larger float. If they invest in companies with a big float, their large purchases will not impact the share price as much.

Special Considerations

A company is not responsible for how shares within the float are traded by the public—this is a function of the secondary market. Therefore, shares that are purchased, sold, or even shorted by investors do not affect the float because these actions do not represent a change in the number of shares available for trade. They simply represent a redistribution of shares. Similarly, the creation and trading of options on a stock do not affect the float.

Example of Floating Stock

As of September 2023, General Electric (GE) had 1.088 billion shares outstanding.

1

 Of this, 0.20% were held by insiders and 75.81% were held by large institutions.

2

 Therefore, a total of 76% or 830 million shares were likely not available for public trading. The floating stock is therefore about 260 million shares (1.088 billion - 830 million).

It is important to note that institutions don't hold a stock forever. The institutional ownership number will change regularly, although not always by a significant percentage. Falling institutional ownership coupled with a falling share price could signal that institutions are dumping the shares. Increasing institutional ownership shows that institutions are accumulating shares.

Is Floating Stock Good or Bad?

Stock float isn't good or bad, but it can affect an investor's decisions. The amount of floating stock a company has—the shares made available to trade—can affect the liquidity of that stock. Stocks with a smaller float tend to have high volatility, while stocks with a larger float tend to have lower volatility. Some investors may prefer stocks with higher float, because it's easier to enter and exit positions for these stocks.

What Is Stock Flotation?

Stock flotation is when a company issues new shares to the public. It can help the company raise capital. The opposite of stock flotation is a float shrink, such as with stock buybacks: fewer shares are available to trade.

Capital Gain tax treatment on shares

We all know that income from salary, rental income and business income is taxable. But what about income from the sale or purchase of shares? Many homemakers and retired people spend their time gainfully buying and selling shares but are unsure how this income is taxed. Income/loss from the sale of equity shares is covered under the head ‘Capital Gains’.

Under the head ‘Capital Gains’, income is further classified into:

 (i) Long-term capital gains

(ii) Short-term capital gains

This classification is made according to the holding period of the shares. Holding period means the duration for which the investment is held starting from the date of acquisition till the date of sale or transfer. 

It should be noted that the holding periods of shares and securities are different for different classes of capital assets. For income tax purposes, holding periods of listed equity shares and equity mutual funds is different from the holding period of debt mutual funds. Their taxability is also different.

In this article, we will cover the tax implications on the listed securities like listed equity shares, bonds, bonds and debentures listed on a recognized Indian stock exchange, units of UTI and Zero-coupon bonds. 

Taxation of Gains from Equity Shares

Short-Term Capital Gains (STCG)

If equity shares listed on a stock exchange are sold within 12 months of purchase, the seller may make a short-term capital gain (STCG)  or incur a short-term capital loss (STCL). The seller makes short-term capital gains when shares are sold at a price higher than the purchase price. Short-term capital gains are taxable at 15%. 

Calculation of short-term capital gain = Sale price minus Expenses on Sale minus the Purchase price 

Let's take a look at an example of STCG tax:

In October 2015, Kunal Dalvi paid Rs.38,750 for 250 shares of a publicly traded firm at a price of Rs.155 a share. He sold them for Rs.192 a share after 5 months for Rs.48,000. Let's see how much money he makes in the short run.

Full sales value - Rs.48,000

Brokerage at 0.5% - Rs.240

Purchase price - Rs.38,750

 

Therefore short-term capital gain made by Kunal will be: Rs.48,000 - (Rs.38,750+ Rs.240) = Rs.9,010

What if your tax slab rate is 10% or 20% or 30%?  

A special rate of tax of 15% is applicable to short-term capital gains, irrespective of your tax slab. 

Long-Term Capital Gains (LTCG)

If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL). 

Before the introduction of Budget 2018, the long-term capital gain made on the sale of equity shares or equity-oriented units of mutual funds was exempt from tax, i.e. no tax was payable on gains from the sale of long-term equity investments. 

The Financial Budget of 2018 took away this exemption. Henceforth, if a seller makes a long-term capital gain of more than Rs.1 lakh on the sale of equity shares or equity-oriented units of a mutual fund, the gain made will attract a long-term capital gains tax of 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller. These provisions will apply to transfers made on or after 1 April 2018. 

Also, this new provision was introduced prospectively, i.e. gains starting from the 1st of Feb 2018 will only be considered for taxation. This is known as the ‘grandfathering rule’. Any long-term gains from the equity instruments purchased before the 31st of January 2018 will be calculated according to this ‘grandfathering rule’. 

Example: Atul purchased shares for Rs.100 on 30th September 2017 and sold them for Rs.120 on 31st December 2018. The stock value was Rs.110 as of 31st January 2018. Out of the capital gains of Rs.20 (i.e. 120-100), Rs.10 (i.e. 110-100) is not taxable. Rest Rs.10 is taxable as capital gains at 10% without indexation.

The following table demonstrates the nature of a long-term capital gain tax on shares and other securities. 

Particulars Tax rate

STT-paid sales of listed shares on recognized stock exchanges and MFs 10% on amounts over Rs 1 lakh

STT is paid on the sale of shares, bonds, debentures, and other listed securities. 10%

Sale of debt-oriented MFs With indexation - 20%

Without indexation - 10%

Loss From Equity Shares

Short-Term Capital Loss (STCL)

Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short term or long-term capital gains made during these eight years. 

It is worth noting that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an income tax return is a must for carrying forward these losses.    

Long-Term Capital Loss (LTCL)

Long-term capital loss from equity shares until Budget 2018 was considered a dead loss – It could neither be adjusted nor carried forward. This is because long-term capital gains from listed equity shares were exempt. Similarly, their losses were neither allowed to be set off nor carried forward.

After the Budget 2018 has amended the law to tax such gains made more than Rs 1 lakh at 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds, etc., would be carried out forward.

Long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set off and carried forward in accordance with existing provisions of the Act. Therefore, the long-term capital loss can be set off against any other long-term capital gain. Please note that you cannot set off long-term capital loss against short-term capital gains. 

Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains. To set off and carry forward these losses, a person has to file the return within the due date. 

Securities Transaction Tax (STT)

STT is applicable on all equity shares sold or bought on a stock exchange. The above tax implications are only applicable to shares listed on a stock exchange. Any sale/purchase on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.

Grandfathering clause

A grandfathering clause is a provision that states that an old rule will continue to apply to some existing instances while a new rule will apply to all future cases. Individuals who are not subject to the new rule are said to have grandfather rights, acquired rights, or have been grandfathered in.

Long-term capital gains (LTCG) on the transfer of listed equity shares and equity-oriented mutual fund schemes were tax-free until the 2017-18 fiscal year.

The Finance Act, 2018 reinstated the LTCG tax on the sale of listed shares and equity-oriented mutual fund schemes with effect from April 1, 2018, i.e. the fiscal year 2018-19, with a grandfathering clause.

While the LTCG was reintroduced on 1st February 2018, the CBDT (Central Board of Direct Taxes) grandfathered gains up to 31st January 2018, i.e. no tax would be paid on gains accrued until 31st January 2018.

Grandfathering Clause Formula

The acquisition cost is calculated as follows:

Value I is the fair market value (FMV) as of January 31, 2018, or the actual selling price, whichever is lower.

Value II equals Value I or the actual purchase price, whichever is greater.

Long-Term Capital Gain = Sales Value - Acquisition Cost (as calculated above)

Tax responsibility = In a year, LTCG of Rs 1 lakh is tax-free. Thus, after subtracting Rs 1 lakh from the total tax gain, the tax burden will be 10% (plus applicable surcharge and cess).

Share Sale as Business Income

Certain taxpayers treat gains or losses from the sale of shares as ‘income from a business, while others treat it as ‘Capital gains’. Whether your gains/losses from the sale of shares should be treated as business income or be taxed under capital gains has been a matter of much debate. 

In case of significant share trading activity (e.g. if you are a day trader with lots of activity or regularly trade in Futures and Options), your income is usually classified as income from the business. In such a case, you are required to file an ITR-3, and your income from share trading is shown under ‘income from business & profession’.

Calculation of Income From Business

When you treat the sale of shares as business income, you can reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year and, consequently, charged at tax slab rates. 

Calculation of Income From Capital Gains

If you treat your income as capital gains, expenses incurred on such transfer are allowed for deduction. Also, long-term gains from equity above Rs 1 lakh annually are taxable, while short-term gains are taxed at 15%

Bombay Stock Exchange

The Role of the Bombay Stock Exchange in India's Financial Landscape

Introduction

The stock exchange is a marketplace where securities like stocks, bonds, and other financial instruments are traded between buyers and sellers. It provides a platform for companies to raise capital by selling their securities to the public and for investors to buy and sell these securities to potentially earn a profit.

 In India, there are two primary stock exchanges - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). BSE is the oldest stock exchange in Asia, founded in 1875. It is located in Mumbai and has a market capitalisation of over $3.5 trillion as of February 2023. In addition, the BSE has over 5,500 listed companies and is one of the world's top stock exchanges in terms of the number of listed entities.

 The BSE offers various trading platforms, including the BSE Sensex, which is India's benchmark stock market index. The BSE Sensex comprises 30 of the largest and most actively traded stocks on the BSE. Thus, the BSE has played a crucial role in India's economic growth by providing a platform for companies to raise capital and for investors to participate in the country's growth story.

What is Bombay Stock Exchange?

The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia and one of the largest in the world, located in Mumbai, India. Established in 1875, the BSE provides a platform for trading various financial instruments, including stocks, derivatives, and currencies.

 The BSE Sensex, comprising 30 of the largest and most actively traded stocks on the BSE, is India's benchmark stock market index. The BSE has a significant impact on the Indian economy and is considered a barometer of the country's economic performance.

Over the years, the BSE has evolved and introduced various products and services, including equity, debt, and currency trading, mutual funds, and investment banking. It is known for its robust technology infrastructure, efficient trading mechanisms, and high level of transparency and accountability.

The BSE has played a vital role in the development of India's financial market and continues to be a key player in driving the country's economic growth. It has been instrumental in attracting both domestic and foreign investors, making it an essential institution in India's financial landscape.

How does Bombay Stock Exchange work? 

The Bombay Stock Exchange (BSE) is an electronic exchange that provides a platform for trading various financial instruments, including stocks, derivatives, and currencies.

The BSE operates on a principle of price-time priority, where orders are executed based on the best available price and time of order placement. The exchange uses a sophisticated trading platform and order-matching system to ensure that orders are executed quickly and accurately.

Moreover, the BSE has a regulatory framework that ensures transparency and fairness in trading activities. Listed companies must comply with stringent disclosure requirements, and the exchange regularly monitors trading activities to prevent market abuse and insider trading.

Investors can access the BSE through brokerage firms or online trading platforms. They can place orders to buy or sell securities, which are executed by the exchange based on prevailing market condition

Different between NSDL and CDSL

Difference Between NSDL and CDSL

The process of buying and selling shares is possible in India because of depositories and as an investor, it is important to know about the two functioning depositories.

In India, there are two depositories: National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). Both the depositories hold your financial securities, like shares and bo plnds, in dematerialised form and facilitate trading in stock exchanges. However, to make use of the depositories and start your investing journey, you must open a Demat account and a trading account. You must always remember to open the best Demat account with a reliable stockbroker as it will help you make wise investment decisions.

Understanding depositories and depository participants:

Both NSDL and CDSL are depositories that maintain ownership records of financial securities. They are linked with investors through Depository Participants (DPs), also called stockbrokers.

A DP is a depository agent acting as an intermediary between the depository and its clients. DPs are registered with the depository via the relevant provisions of the SEBI Act. You have to open a Demat account with a DP to avail the services of depositories.

Typically, DPs are stock brokerage firms that provide investors with the service of opening Demat and trading accounts along with providing a trading platform, market reports and other value-added services.

Functioning of Depositories

Once you start trading, the securities you buy or sell are debited or credited from the depository and reflected in your Demat account.

Depositories provide information to listed companies about shareholders while facilitating trading transactions. Furthermore, the listed companies approach the depositories to get information about the shareholders to send notifications such as dividend rights, stock splits etc.

What is NSDL?

NSDL is the oldest and largest depository in India. It commenced operations in 1996 in Mumbai. It was the first depository to provide trading services in electronic format.

According to data from SEBI, NSDL has around 2.4 crore active investors, with more than 36,123 depository participant service centres across 2,000 cities.

NSDL is entrusted with the safekeeping of the following financial securities in the electronic format:

Stocks

Bonds

Debentures

Commercial papers

Mutual Funds

NSDL offers a wide range of services, like:

Dematerialisation services

Rematerialisation services

Transfers between depositories

Off-market transfers

Lending of securities

Collateral and mortgage of securities

What is CDSL?

CDSL started operations in Mumbai in 1999 and is the second-largest depository in the country after NSDL.

Like NSDL, it provides all services, like holding financial securities in the electronic format and facilitating trade and settlement of orders. All forms of stocks and securities - just like NSDL - are held at this central depository.

According to data from SEBI, it has more than 5.2 crore active customer accounts with around 21,434 depository participant service centres.

Registration of DPs with NSDL and CDSL:

A stockbroking firm usually selects between the two depositories for registration on the basis of fees and charges, services, and other aspects such as ease of doing business. As an investor, you can check with your DP to know whether they are registered with NSDL or CDSL. Some stockbrokers are also registered with both depositories.

Difference between NSDL and CDSL:

In terms of services to investors, there is no key difference between having a Demat account with a DP registered either with NSDL or CDSL. Both are regulated by SEBI and provide similar trading and investing services. The only difference between both the depositories is their operating markets. While NSDL has National Stock Exchange (NSE) as the primary operating market, CDSL’s primary market is the Bombay Stock Exchange (BSE).

Conclusion:

An investor can easily open a Demat account, and a trading account with a DP linked with either of the depositories. While beginning your investment journey in stock markets, always remember to choose a trusted and reliable stockbroker who can provide you with cutting-edge trading platforms and features like a free online Demat account and zero Annual Maintenance Charge (AMC).

What is Demat Account?

What is Demat Account?

The Demat full form stands for a Dematerialised Account. Demat is a form of an online portfolio that holds a customer’s shares and other securities. 

A Demat account is used to hold shares and securities in an electronic (dematerialised) format. These accounts can also be used to create a portfolio of one’s bonds, ETFs, mutual funds, and similar stock market assets.

Demat trading was first introduced in India in 1996 for NSE transactions. As per SEBI regulations, all shares and debentures of listed companies have to be dematerialised in order to carry out transactions in any stock exchange from 31st March 2019.

Features of Demat Account

Here are some of the key features to understand demat account meaning better-

Easy Access

It provides quick & easy access to all your investments and statements through net banking.

Easy Dematerialization of Securities

The depository participant (DP) helps to convert all your physical certificates to electronic form and vice versa. 

Receiving Stock Dividends & Benefits

It uses quick & easy methods to receive dividends, interest or refunds. It is all auto-credited in the account. It also uses Electronic Clearing Service (ECS) for updating investors’ accounts with stock splits, bonus issues, rights, public issues, etc.

Easy Share Transfers

Transfer of shares has become much easier and time-saving with the use of a demat account.

Liquidity of Shares

Demat Accounts have made it simpler, faster and more convenient to get money by selling shares.

Loan Against Securities

After opening a demat account, one can also avail of a loan against the securities held in your account.

Freezing Demat Account

One can freeze a certain amount or type of their demat account securities for a certain period of time. This eventually will stop the transfer of money from any debit or credit card into your account.

How Does A Demat Account Work?

In general, Demat Accounts are used to hold the purchased shares by an individual-

A significant thing to note here is that the buyer and seller may hold a demat account with DPs associated with different depositories.

Documents Required for Opening a Demat Account

PAN card

Aadhar card

Address Proof

Passport size photos

ID proof

You may also want to know How to Open a Demat Account

Types of Demat Account

An investor can opt to open demat account of any of the following types-

Regular Demat Account

All residing Indian citizens are eligible to open regular Demat accounts.

Repatriable Demat Account

Non-resident Indians can open Demat accounts of repatriable types. One can transfer money from overseas through such accounts, provided it is linked to an NRE bank account.

Non-repatriable Demat Account

Non-repatriable accounts are also for NRIs, however, these accounts cannot be used to transfer funds from abroad. An individual has to link an NRO bank account to own and operate this type of Demat account.

Customers holding Demat accounts need to open a trading account to buy or sell securities from the stock market. While respective Depositories and Depository Participants regulate Demat accounts, a trading account follows the regulations mandated by SEBI.

Benefits of Demat Accounts

Investors who opt to open Demat account can enjoy several benefits. Here are some of the most common benefits.

Demat accounts eliminate the risk of damage, forgery, misplacement, or theft of physical shares.

The electronic system is also considerably simpler and can be completed within hours. It has eliminated several time-consuming operations, which has made the entire process streamlined and time-saving.

Demat accounts come with remote access benefits, provided individuals have a registered net banking facility with the concerned financial institution.

Investors can merge bank accounts with dematerialized accounts to facilitate electronic fund transfers.

Customers can benefit from a nomination facility if they open a Demat account online.

Account holders with a specific unit of securities in their portfolio can opt to freeze their accounts for a specific period. This can prove helpful to avoid any unwanted transaction into one’s Demat account.

Demat Account Number and DP ID

Investors are also issued a DP ID, or Depository Participant ID, by their preferred broking firm or other financial institutions. DP ID forms a part of one’s account number, as this ID denotes the first eight-digit of the account number.

Both depository and depository participants use this data when an investor converts physical shares to Demat, transfers shares from one Demat account to another, or transfers money from a Demat account to a bank account.

Demat Account Charges

Although any investor can open a free Demat account, there are certain charges that are levied on that account to ensure its smooth operations. Each brokerage firm (including banks) comes with its unique brokerage charges. Here are some of those–

Annual Maintenance Charges

Almost every firm levies a fee as an annual maintenance charge for Demat account. Depositories follow specific guidelines to calculate the fee applicable for each investor.

SEBI has implanted a revised rate for Basic Services Demat Account, or BSDA, from 1st June 2019. According to the revised guidelines, no annual maintenance charge will be applicable for debt securities of up to Rs.1 lakh, while a maximum of Rs.100 can be levied on holdings of Rs.1 lakh to Rs.2 lakh.

Custodian Fees

Depository partners charge a custodian fee as a one-time or annual basis. The sum is paid directly to the depository (NDSL or CDSL) by the company.

Demat and Remat charges

Such expenses are levied as a percentage of the total value of shares purchased or sold to cover all digitisation or physical print costs of securities.

Other than the above-mentioned fees, an investor is also liable to pay fees like credit charges, applicable taxes and CESS, rejected instruction charges, etc.

Demat accounts play a crucial role in stock market investments, as it is one of the most common methods of investing in the stock market. However, recently, several online platforms provide the benefit of online trading without such account

What is IPO?

What is IPO?

Initial Public Offering (IPO) refers to the process where private companies sell their shares to the public to raise equity capital from the public investors. The process of IPO transforms a privately-held company into a public company.

 This process also creates an opportunity for smart investors to earn a handsome return on their investments.

Investing in IPOs can be a smart move if you are an informed investor. But not every new IPO is a great opportunity. Benefits and risks go hand-in-hand. Before you join the bandwagon, it is important to understand the basics.

Types of IPO

There are two common types of IPO. They are-

1) Fixed Price Offering

Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. The investors come to know about the price of the stocks that the company decides to make public. 

The demand for the stocks in the market can be known once the issue is closed. If the investors partake in this IPO, they must ensure that they pay the full price of the shares when making the application.  

2) Book Building Offering

In the case of book building,  the company initiating an IPO offers a 20% price band on the stocks to the investors. Interested investors bid on the shares before the final price is decided. Here, the investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share. 

The lowest share price is referred to as floor price and the highest stock price is known as cap price. The ultimate decision regarding the price of the shares is determined by investors’ bids.

IPO Advantages and Disadvantages

Investing in IPOs comes with both merits and demerits. Here are a few of the benefits and drawbacks you must know before making your investment decision.

Benefits of Investing in an IPO

Investing in an initial public offering withholds the below-mentioned advantages-

Increased Recognition

When weighing the advantages and cons of an IPO, this good factor comes out on top. It assists management in gaining more reputation and credibility by becoming a trustworthy organization.

Companies that are publicly traded are typically more well-known than their private competitors. In addition, a successful process attracts media attention in the financial sector.

Access to Capital

A corporation may never receive more capital than it raises by going public. A company's growth trajectory might be substantially altered by the substantial cash available. An ambitious company may enter a new period of financial stability following its IPO.

This decision can help R&D, hire new employees, establish facilities, pay off debt, finance capital expenditures, and purchase new technologies, among other things.

Diversification Opportunity

When a corporation becomes public, its shares are traded on an exchange amongst investors. This increases investor diversity because no single investor owns a majority of the company's outstanding stock. As a result, purchasing stock in a publicly listed company can help diversify investment portfolios.

Management Discipline

Going public encourages managers to prioritize profitability over other objectives, such as growth or expansion. It also makes contact with shareholders easier because they can't hide their issues.

Third-Party Perspective

When a company goes public, it gains an independent perspective on its business model, marketing strategy, and other factors that could hinder it from becoming profitable.

Disadvantages of Investing in IPO

There are a few factors an investor would have to consider before starting to invest in an IPO-

More Costs

IPOs can be quite costly. Aside from the continuous costs of regulatory compliance for public firms, the IPO transaction process necessitates the investment of capital in an underwriter, an investment bank, and an advertiser to ensure that everything runs well.

Lesser Autonomy

Public companies are led by a board of directors, which reports directly to shareholders rather than the CEO or president. Even if the board delegated authority to a management team to oversee day-to-day business operations, the board retains the final say and the authority to fire CEOs, including those who founded the company.

Some businesses circumvent this by going public in a way that grants its founder veto power.

Extra Pressure

In the midst of market turmoil, publicly traded firms are under enormous pressure to keep their stock values high. Executives may be unable to make hazardous decisions if the stock price suffers as a result. This occasionally foregoes long-term planning in favor of immediate gratification.

Terms Associated with IPO

Issuer

An issuer can be the company or the firm that wants to issue shares in the secondary market to finance its operations.

Underwriter

An underwriter can be a banker, financial institution, merchant banker, or a broker. It assists the company to underwrite their stocks.

The underwriters also commit that they will subscribe to the balance shares if the stocks offered at IPO are not picked by the investors.

Fixed Price IPO

Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. 

Price Band

A price band can be defined as a value-setting method where a seller offers an upper and lower cost limit, the range within which the interested buyers can place their bids.

The range of the price band guides the buyers. 

Draft Red Herring Prospectus (DRHP)

The DRHP is the document that makes the public know about the company’s IPO listings after the approval made by SEBI.

Under Subscription

Under Subscription takes place when the number of securities applied for is less than the number of shares made available to the public.

Oversubscription

Oversubscription is when the number of shares offered to the public is less than the number of shares applied for.   

Green Shoe Option

It refers to an over-allotment option. It is an underwriting agreement that permits the underwriter to sell more shares than initially planned by the company. It happens when the demand for a share is seen higher than expected.

Book Building

Book building is the process by which an underwriter or a merchant banker tries to determine the price at which the IPO will be offered.

A book is made by the underwriter, where he submits the bids made by the institutional investors and fund managers for the number of shares and the price they are willing to pay. 

Flipping

Flipping is the practice of reselling an IPO stock in the first few days to earn a quick profit.

Any individual who is an adult and is capable of entering into a legal contract can serve the eligibility norms to apply in the IPO of a company.  However, there are some other inevitable norms an investor needs to meet.

The eligibility criteria are-

It is required that the investor interested in buying a share in an IPO has a PAN card issued by the Income Tax department of the country.

One also needs to have a valid demat account. 

It is not required to have a trading account, a Demat account serves the purpose. However, in case an investor sells the stocks on listings, he will need a trading account. 

It is often advised to open a trading account along with the Demat account when an investor is looking forward to investing in an IPO

CAGR

What is CAGR?

CAGR (Compound Annual Growth Rate) measures your investments' average annual growth over a given period. It shows you the average rate of return on your investments over a year. CAGR is a helpful tool for investors because it precisely measures investment growth (or decline) over time. When calculating CAGR, profits are assumed to be reinvested at the end of each year of the time horizon. Therefore, CAGR is a representative number, not an accurate return. In most cases, an investment cannot grow at the same rate year after year. Despite this, the CAGR calculator is widely used to compare alternative investments.

Keeping this common application of the calculation in mind, it is prudent that investors find a convenient way to calculate CAGR. Anyone who wants to estimate the return on investment can use the CAGR calculator. The Compound Annual Growth Rate formula is used in this application's calculations (CAGR formula). For example, if you have a mutual fund that has appreciated over time, you can use the calculator to determine the rate of return on your investment. The CAGR return calculator will provide you with an annual growth rate that you can compare to a benchmark return.

How to calculate CAGR?

To calculate the compounded annual growth rate on investment, use the CAGR calculation formula and perform the following steps: 

• Divide the investment value at the end of the period by the initial value.
• Increase the result to the power of one divided by the tenure of the investment in years.
• Subtract one from the total.

Mathematically speaking, the CAGR formula is given by the following equation-

CAGR = (FV / PV) ^ (1 / n) – 1

In the above formula, FV stands for the future value of the investment, PV stands for the present value of the investment, and n stands for the number of years of investment. To understand the calculation better, let's look at a hypothetical situation. Consider you invested Rs.20000 in a mutual fund in 2015. The investment will be worth Rs.35000 in 2020. Using the formula, the CAGR of this mutual fund investment will be-

CAGR= (35000/ 20000) ^ (1/5) – 1 = 11.84%

Here, the results mean the mutual fund investment gave you an average return of 11.84% per annum. You can also calculate the absolute returns on investment using the CAGR calculator. The calculation will be-

Absolute returns= (FV- PV) / PV * 100 = (35000-20000)/ 20000 * 100 = 75%

This means your mutual fund investment gave you an absolute return of 75% over its tenure.

How to calculate CAGR

Benefits Of CAGR Calculator Online

It enables investors to assess the returns in a variety of scenarios. You can use several test cases to evaluate returns in various scenarios. 

It is straightforward to use. You only need to enter the initial value, the final deal, and desired investment period, and the online CAGR calculator will take care of the rest. 

Assume that you purchased some units of an equity fund earlier and that their value has since increased. You can calculate the gains on your investment using the CAGR online calculator.

It gives you a comprehensive idea of your return on investment. 

You can also use the compound annual growth rate calculator to compare stock performance to that of peers or the industry as a whole.