Applicant

An applicant, in the investment world, is an individual or institution that formally applies to buy a newly issued security. This most commonly happens during an Initial Public Offering (IPO), when a private company first offers its equity to the public. However, one can also be an applicant for other new issues, such as a fresh batch of corporate bonds or a secondary stock offering. Think of an applicant as someone trying to buy a product directly from the factory before it hits the retail shelves (the stock market). This role is distinct from that of a regular investor who buys securities on the open market from other investors. Being an applicant involves participating in the primary market, a process filled with its own unique rules, risks, and, for the savvy investor, red flags.

When a company decides to “go public,” it's a huge event, meticulously planned and marketed. The company, with the help of its underwriter (an investment bank), creates a detailed document called a prospectus. This is the rulebook, financial history, and business plan all rolled into one. For an applicant, the journey typically looks like this:

1. 1. Do Your Homework: The applicant first gains access to the prospectus. This document contains everything from the company's business model and financial statements to potential risks and details about how the IPO proceeds will be used.
2. 2. Place Your Order: The applicant then submits an application, usually through a brokerage firm, to buy a certain number of shares. In some IPO structures, you might also specify the price you are willing to pay.
3. 3. The Waiting Game: The underwriters collect all the applications. If more shares are applied for than are available—a situation known as being “oversubscribed”—the bank must decide how to allocate the shares. Popular IPOs are almost always oversubscribed, meaning small applicants may receive only a fraction of the shares they requested, or none at all.
4. 4. Allocation and Trading: If the application is successful, the shares are allocated to the applicant's account. The stock then begins trading on a public exchange, like the New York Stock Exchange or Nasdaq, where its price will be determined by supply and demand.

While the thrill of getting in on the “ground floor” of the next big thing is a powerful lure, value investors view the role of an IPO applicant with extreme skepticism. The entire process is often tilted in favor of the seller, not the buyer.

IPOs are marketing events. They are designed by sellers (the company and its early backers) to fetch the highest possible price. This environment of excitement and media frenzy often pushes the offering price far above the company's true intrinsic value. A value investor's primary goal is to buy a great business at a sensible price, ensuring a margin of safety. In a hot IPO, that margin of safety is often nowhere to be found. As Warren Buffett has noted, sellers choose to go public when they can get a fantastic price, which is rarely a good time for buyers.

There's a peculiar paradox in IPOs known as the winner's curse. Think about it: if an IPO is truly a great deal, institutional investors with vast research teams will be clamoring for shares. It will be heavily oversubscribed, and a small applicant will be lucky to get any shares. Conversely, if you, as a small applicant, get your full application filled, what does that tell you? It often means the “smart money” didn't want it. You “won” the right to buy something that the most informed market participants passed on, raising the odds that you overpaid.

If, despite the risks, you're considering applying for shares in an IPO, you must shift from being a hopeful applicant to a skeptical detective. Here’s a checklist to guide you:

• Read the Prospectus Religiously: Don't just skim the summary. Dive deep into the “Risk Factors” section. This is where the company is legally required to tell you what could go horribly wrong. Also, scrutinize the financial statements and management's discussion.
• Understand the Business: Can you explain, in simple terms, how the company makes money and what its competitive advantages are? If the answer is no, you have no business applying. Pass on businesses operating outside your circle of competence.
• Analyze the Price Tag: Is the IPO price reasonable? Compare its valuation metrics (like price-to-earnings or price-to-sales ratios) to established, publicly traded competitors. Don't get swept up in the story; focus on the numbers.
• Watch the Insiders: Check the prospectus to see if the company's founders, managers, and early investors are selling their own shares in the IPO. If they are cashing out in large numbers, why should you be rushing to cash in? Also, look for the lock-up period—the length of time insiders must wait before selling their shares after the IPO. A shorter period can be a red flag for a quick cash-grab.