Mastering in An IPO Allotment for Maximum Returns

January 11, 2024 Nancy Ahuja

What is IPO Allotment

An Initial Public Offering (IPO) allotment refers to the process of allocating shares to investors who have applied for them during the IPO subscription period. When a company decides to go public, it issues new shares to the public through an IPO. Investors interested in purchasing these shares need to apply for them through an application process facilitated by financial institutions known as underwriters.

After the IPO subscription period closes, the underwriters and the company determine how many shares each applicant will receive based on various factors, such as the number of shares available, the demand for the shares, and the allocation method chosen. The IPO allotment process aims to distribute shares fairly among the applicants.

There are different methods of IPO share allotment, including:

Proportionate Basis (Fixed Price): Allotment is made in proportion to the number of shares applied for. For example, if an investor applies for 100 shares and the IPO is oversubscribed, they may receive a proportionate allotment based on the total demand.
Lottery System: In case of oversubscription, shares are allotted randomly through a lottery system. Investors have an equal chance of getting shares regardless of the quantity applied for.
Anchor Investor Allotment: In some cases, a portion of the IPO shares may be reserved for anchor investors, who are institutional investors who commit to a significant investment in the IPO before it opens to the public.

What is Sensex?

Sensex or S&P BSE Sensex is a stock market index of the Bombay Stock Exchange (BSE) in India. It is a market-capitalization-weighted index comprising 30 of the largest and most actively traded stocks on the BSE.

Sensex is calculated by dividing the total market capitalization of the 30 Sensex stocks by a factor called the ‘index divisor.’ The market capitalization of a stock is calculated by multiplying the current market price of a stock by the total number of outstanding shares of the company. It is a dynamic index, and its value changes based on market movements and fluctuations in the prices of stocks included in the index.

Sensex has a long history starting from 1986 when it was first calculated considering a base value of 100. Today, Sensex value stands at around 50,000 points, indicating the collective value of the 30 Sensex stocks.

The Transformative Power of Sensex

Sensex has transformed the Indian economy and financial markets in many ways. It has been a barometer for the country’s economic growth and a symbol of confidence for investors. Sensex’s rise or fall reflects investor sentiments and economic indicators and has acted as a catalyst for economic reforms in India.

Sensex is often a starting point for foreign investors looking to invest in India, and with its diverse range of stocks, it represents a variety of sectors and industries, offering investors a chance to diversify their portfolios. The transparent and efficient functioning of Sensex has increased investor confidence, and the BSE’s robust regulations and monitoring have ensured the integrity of the market.

Sensex also provides the facility for the growth of mutual funds in India, as many mutual fund schemes are good against Sensex, and investors often use Sensex as a reference point for choosing mutual funds. Sensex plays a vital role in evaluating the performance of companies, and investors rely on it to compare a company’s performance relative to the market.

The Sensex has given rise to a range of investment products and services that broaden the scope of investing beyond equities. For example, investors can invest in exchange-traded funds (ETFs) that track Sensex, or buy Sensex futures and options contracts for hedging or speculation.

Investing in Sensex Beyond Equities

Investing in Sensex beyond equities means investing in the index itself, or in Sensex-related products and services. Here are some of the ways investors can gain exposure to Sensex beyond equities.

Sensex ETFs

The exchange-traded fund is the full form of ETF that holds a basket of assets, such as stocks, bonds, or commodities, and trades like a stock. Sensex ETFs track the performance of Sensex and provide investors with low-cost and diversified exposure to the Indian stock market. ETFs are ideal for investors who want to invest in equities but do not want to take on the risk of investing in individual stocks.

For example, the Reliance ETF (Nippon India ETF) Sensex fund is a popular Sensex ETF that trades on the BSE and NSE. Investors can buy and sell the fund on the stock exchange like any other stock and benefit from the underlying performance of Sensex.

Sensex Futures and Options

Sensex futures and options are derivative contracts that allow investors to speculate on the future price movements of Sensex.

For example, an investor can buy a Sensex call option that gives them the right to buy Sensex at a predetermined price in the future. If the price of Sensex goes up, the investor can exercise the call option and make a profit. Conversely, if the price of Sensex goes down, the investor can let the option expire and limit their losses to the premium paid for the option.

Sensex Mutual Funds

Sensex mutual funds are active funds that invest in a portfolio of stocks that are part of Sensex. These funds aim to generate returns that match or beat the Sensex index. Sensex mutual funds offer investors a convenient way to invest in equities without having to select individual stocks.

For example, the SBI ETF Sensex fund is a passive Sensex fund that aims to replicate the performance of Sensex. The fund invests in the same stocks as Sensex in the same proportion, giving investors a low-cost and tax-efficient way to invest in Sensex.

Conclusion

Sensex has come a long way since its inception and has transformed the Indian financial landscape. Investing in Sensex beyond equities can provide investors with diversified exposure to the Indian stock market and offer a range of investment opportunities. However, like any investment, investing in Sensex products and services carries risks, and investors must gauge the pros and cons carefully.

Summary:

Sensex, the barometer of India’s stock market, has transformed the Indian financial landscape in many ways. Sensex is a market-capitalization-weighted index of the 30 largest and actively traded stocks on the Bombay Stock Exchange (BSE). Sensex’s transparent and efficient functioning has increased investor confidence, and Sensex has facilitated the growth of mutual funds in India. Sensex-related products and services such as ETFs, futures, and options provide investors with opportunities to invest beyond equities in Sensex. However, investing in Sensex products and services carries risks, and investors must conduct their research carefully

Disclaimer: Investors must conduct their research and seek professional advice before investing in the Indian stock market.