Impacting primary market decisions
Investors often get swayed by the current trend and change their investment decisions accordingly without taking specific factors into account to back these decisions, writes Arnav Pandya.Updated: Mar 12, 2008 23:38 IST
Initial public offers (IPOs) in India can go to extremes, swinging from euphoria to despair within hours. A sudden change in market conditions can lead to decisions that may cause a financial impact. Investors often get swayed by the current trend and change their investment decisions accordingly without taking specific factors into account to back these decisions. It is these factors that have to be kept in the forefront. Here is a look at how different situations can be tackled by investors.
Cut in price band
This is a situation where the company making a public issue reduces the price band that is offered for shares. One immediate implication of this position is that the investors will get shares at a cost that is lower than what they were getting earlier. Investors must be aware of the implications of such a movie and the extent of the price cut. They must question whether the company is worth investing in and whether the cut would result in a situation where the share price is in the acceptable investment zone of the investor. If the answer to these is yes only then should the investment be considered. Many people tend to keep looking at the previously offered price and the new price and say that there is a discount available but if the final cost for the individual is high then the investment is not viable.
Decision making for the investment has to be based upon several other factors, which include the nature of the company and the growth prospects of the entity. All this has to be considered to see whether an investment is feasible and then a particular valuation or a price should be arrived at for the company. The expectation of a certain kind of return will be based upon the price at which the investment is bought.
The key part of the entire exercise is to link the decision about the investible price along with the offer price of the shares at the applicable price band. If the company decides to go for a discount there is a possibility that this is being offered against some previous price and can result in a situation where the valuation becomes attractive. The prevailing market conditions and the expected future price movements are a few additional factors that also need to be brought into the picture. Only when all this is done will the investor find that investing in new issues is not a random event but involves some bit of work too.
(The author is a certified financial planner)