‘New’ is always a word of excitement, don’t you agree? Well, in every aspect of life, it is known to be quite exciting when it is new. Same thing happens when we come to the investing world. Just like how LIC goes public, and it is one of the biggest companies in the country to take that leap – aren’t the investors on their toes and ready to start investing? The same would apply when there is a new mutual fund that you get to choose or a new real estate offer around the block. When we talk about all the ‘news’ – it is only right if we also talk about IPOs and NFOs.
Now, most people have mostly heard of IPOs. They are quite popular, to be very honest. But, NFOs – you are mostly not quite sure. You should also remember that you cannot get confused with the two of them as the same. Let’s understand them both to get a clear picture of what they are and how they work.
What is an IPO?
An initial public offering – where a private firm sells its stock to the general public for the first time (IPO). An IPO essentially signifies that a company’s ownership is changing from private to public. As a result, the process of going public is also referred to as “going public.”
Companies that are just getting started or those that have been in business for decades can choose to go public through an IPO.
Companies usually go public to raise funds to pay off debts, support expansion projects, increase their public profile, or allow firm insiders to broaden their holdings and also create liquidity through the sale of all or a part of their private shares as part of the IPO.
After deciding to “go public,” a firm selects a lead underwriter to assist with the securities registration, IPO subscription procedure, and public distribution of shares. The lead underwriter then assembles a syndicate of investment banks and broker-dealers to sell IPO shares to institutional and individual investors.
What is an NFO?
A New Fund Offer is how an asset management business raises money for security purchases. This is done by launching a new fund on a first-subscription basis.
The chance to subscribe to a new fund offer is only accessible in the short term. During the pre-defined period – investors could purchase units of the mutual fund scheme and subscribe to the NFO at an offer price.
This is normally set at Rs ten. Investors would be able to buy fund units at the set price once the tenure has expired. In general, NFO subscribers have seen significantly higher gains after the listing.
What are the Similarities Between NFOs and IPOs?
IPOs and NFOs are similar in that both involve soliciting funds from the general public. NFOs, like IPOs, are available for subscription for a set length of time. Of course, unlike an IPO, the NFO is open for subscription for much longer. NFOs, like IPOs, have costs associated with marketing, administration, legal, and compliance, among other things.
Another similarity between an IPO and an NFO is that they both occur during periods of high growth and consistent stock market returns. SEBI regulates both NFOs and IPOs, covering all aspects from prospectus submission to actual fund allocation.
Finally, during market peaks, both NFOs and IPOs enjoy the frantic subscription. While IPO stories are well-known, there are also tales of funds of different companies experiencing massive retail investor excitement during their initial public offerings and more.
What Should you Invest in?
If you have two options left on the table, what would you be choosing? This would be your state when it comes to making a decision between choosing from an NFO and an IPO, don’t you think?
Investing in an NFO
The fund house utilizes an NFO to raise money from the public in order to purchase market instruments such as equity shares and more. As it is new to the market – the NFO is less expensive than current funds. They are quite similar to IPOs, in which the general public can buy the stock before it’s listed on a stock exchange.
Furthermore – the marketing efforts that go into its promotion make it a ‘can’t-miss’ occasion. However, before selecting one, you should exercise your judgment and knowledge.
Investing in an IPO
You promise to purchase shares of the stock at the offering price before it begins trading on the secondary market when you participate in an IPO. The lead underwriter and the issuer set the offering price based on a number of variables, including indications of interest from potential investors in the offering.
You must first verify whether your brokerage business gives access to new issue share offerings and, if so, what the qualifying conditions are before you may invest in an IPO. Higher-net-worth individuals or experienced traders who are aware of the dangers of engaging in an IPO are typically eligible. Individual investors may have trouble purchasing shares in an IPO since demand frequently exceeds supply.
Since there is a scarcity value of IPOs, many brokerage firms restrict who can participate by requiring customers to have a considerable amount of assets with the firm, fulfill particular trading frequency standards, or have maintained a long-term connection with the firm.
If you have done all of your research and have been assigned shares in an IPO, you should be careful – that while you are free to sell shares obtained through an IPO whenever you see fit, many firms will limit your ability to participate in future offerings if you sell it within the first few days of trading. “Flipping” is the practice of swiftly selling IPO shares, and it is frowned upon by most brokerage houses.
You know how crucial it is to make the right kind of investment decisions, and choosing to invest in an NFO or an IPO is one such decision. But, when you know the ground rules and operative methods of the assets you choose to invest in – you are on the right road.