How a Company goes public: Evolution of Shares

Let us start with a simple example which helps to understand easily.

Mr. A always had strong interest in small power plant business. He started business in the same field.
After borrowing money from the bank, he named the company “NDB Energy” and got into business. The
first few years, the co. makes little profit because the earnings are plowed back into the business. Ten
years later, the business has grown rapidly. He has managed to pay off the company’s debt, and the
company is earning handsome profit.

Now he can think of expanding.

He researched his options and found out how much it is going to cost to expand. He can again go to
bank but his net profit will reduce because of interest payment. He has another option- SELL SOME
PORTION OF OWNERSHIP (Note that he is sole owner as of now i.e. he owns 100% of that Company).

He has to approach professionals in this field to get this work done and they are called UNERWRITERS

Who is UNDERWRITER???

The financial institution or investment bank that is doing all of the paperwork and orchestrating a
company's IPO.

Now underwriter evaluates this Company. Now Mr. A has to decide how much he need to raise by stake
sale depending upon which his ownership percentage will come down. Say this company is worth Rs.100
Crore and the owner wants to raise Rs.15 crore he can dilute his ownership by 15% to 85% from current
100%. Thus by selling portion of his ownership Mr. A has raised the fund.

After getting the money:

Mr. A has raised the money for capacity addition. Now after raising the money he can easily come up
with more projects and improve his capacity and geographical presence in the surrounding areas. After
the successful implementation of new projects his revenue and profits have reached new highs. Even
though his stake has come down by 15% because of improved earnings by his company he is able to get
more profit than earlier. As a result of this both company’s and his net worth have improved
considerably.

This is how shares EVOLVE.

Shares will be allotted to the people who have subscribed for the same during IPO (Initial Public
Offering: First time when a company offers its shares). These shares hands when trading start and they
keep on changing the hand daily when share market is open.

Now after knowing how shares are evolved next question that comes to mind is why shares fluctuate???

This is because of myriad reasons. Some of them are as listed:

 1. Internal Factors like:
a. Changing financials of the company like increased or decreased profits.
b. Expansion plans.
c. Mergers and Acquisition.
d. Change in Management
2. External Factors like:
a. National and/or Global Economic conditions
b. Government Policies
c. Changing demographics
d. Entry of new players
These are some of the reasons why share price fluctuate.

Why to invest in stocks:

We work hard to earn more money to make sure that we lead life happily. We save money to make our
future secured and to meet contingencies. To fulfill this we save the money and park it in different
avenues like bank FD, PF and so many other things. We are getting some positive return in them (say
around 10%) and it may make some people glad. But we need to rethink at this point of time regarding
rate of return because this return is being eaten away by INFLTION.