Sensex
Sensex stands for Sensitivity Index. It is the average price of a bunch of top 30 companies from different sectors of the Indian economy.
Let us assume that 3 stocks affect the economy - A, B, and C.
Finance enthusiasts want to track the cumulative effect of these companies or sectors on the economy, and hence, create an index.
Assume that each company has equal weight in the index (33%).
Now, say all the companies were trading at Rs. 100 when the index was created.
So, the value of index will be Rs.100 x 33% (A) + Rs. 100 x 33% (B) + Rs. 100 x 33% (C) = Rs. 100.
Say, after a year, the revised prices are:
A - Rs. 150 (50% up)
B - Rs. 50 (50% down)
C - Rs. 120 (20% up)
It is difficult to assess the cumulative impact on the economy by looking at individual companies? Let’s see if the index helps.
Value of index = Rs. 150 x 33% + Rs. 50 x 33% + Rs. 120 x 33% = 106.67
Comparing Rs. 106.67 to Rs. 100 index value is easier. It tells us that the stock prices of major companies in the economy grew by 6.67%.
This is essentially what Sensex is - a weighted average stock price of 30 top companies in India that helps assess how the overall economy (using top companies as proxy) is doing.
IPO- Initial Public Offering
A Company offering its share for the first time(initial) to the public or investors at large is called an IPO.
You must have a question that Why do companies raise money from the public at large? What do they need it for?
The common reason for going for an IPO include;
1. An Exit for existing shareholders:
The founding team and early-stage investors take a lot of risk in starting that company. More so if it’s an innovative product, and chances of success are low. To be compensated for their hard work, they go for a public offer - that is, offer shares they hold to the public at large. This is also known as “Offer for Sale.” The money goes into the pockets of the shareholders, and NOT to the company.
2. Expansion plans(growth) - It is also possible that a company is looking for diversifying its business, and may choose to raise money from the public at large . so the company or corporation can become public by selling a portion of its stake to the investors. in this way the company expands their business.
3. Paying off existing debts: A company may want to pay off the debt it owes to bankers by raising money from the public. This usually happens when the company has good business prospects in the longer term but is facing a short-term downturn because of some temporary issues. so the company offers shares to the public by offering IPOs.
Types Of IPO- There are two common types of IPO-
1. Fixed Price Offering- It refers to the issue price that some companies set for the initial sale of their shares to the public. Thus the investors come to know about the price of the stocks that the company decides to make public.
If the investors partake in this IPO, they must make sure that they pay the full price of the shares when making applications.
2. Book Building Offering- here, the company initiates an IPO offers a 20% price band on the stocks to the investors. The interested investors bid on the shares before the final price is decided.
The lowest share price is referred to as floor price and the highest stock price is known as Cap price. The investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share.