What an IPO is
In normal trading you buy from another investor. In an IPO shares are offered to the public for the first time. They can be new shares the company issues to raise money, or existing shares that current owners sell part of. In the first case your money goes to the company; in the second, to the sellers. The prospectus tells you which.
The prospectus
A public offering is made on the basis of a prospectus, and the Financial Regulatory Authority publishes prospectuses on its website. These are the main things to look for in one:
- The priceThe offer price per share, or how it will be set.
- The datesThe subscription period, when results are announced, and when trading is expected to start.
- Where to subscribeThrough the parties the prospectus names, such as a licensed bank or company.
- Allotment and surplus cashHow shares are allotted if demand exceeds the offer, and how money for the unallotted part comes back.
- The company itselfIts business, financial statements, use of proceeds, and the risks the company itself lists.
When demand exceeds the offer
ExampleAn invented company, Sahab Technology, offers 1,000,000 shares to the public at EGP 10, and orders reach 4,000,000 shares. If the prospectus says allotment is pro rata, each subscriber gets 1,000,000 ÷ 4,000,000 = 25% of the request. You asked for 2,000 shares and paid EGP 20,000? You get 500 shares for 5,000, and the other 15,000 comes back to you as the prospectus sets out. This is one method; a prospectus can set another.
Watch outAn offer being oversubscribed several times does not guarantee the price rises once trading starts. After listing, supply and demand set the price, and it can fall below the offer price.
Check yourself
1. You ask for 1,000 shares and allotment is pro rata at 20%. How many do you get?
1,000 × 20% = 200 shares.
2. Where do you find the allotment method and the dates?
The prospectus is the reference for every detail of the offer.
Summary
- An IPO is a company's first offer of shares to the public, new or existing.
- The prospectus holds the price, dates, where to subscribe and the allotment method.
- Heavy oversubscription does not guarantee the price direction after listing.