Initial Public Offering is one of the ways companies or their shareholders raise funds from the market. During the process, they offer company shares, and these then get further traded on stock exchanges. For companies, the purpose behind raising funds could be anything like the expansion of business, repaying debt, or mergers and acquisitions. IPOs provide a good opportunity to exit at their terms for shareholders.
IPOs also present an ideal opportunity for investors to benefit in the short and long term. Investing in IPO in many ways is like investing in any other stock; at the same time, some differences make it unique. Following are the potential benefits that make IPOs lucrative:
Potential listing gains are the biggest perks that drive investors to IPOs. Usually, when companies and their merchant bankers set a price for selling shares, they keep some value for investors to attract them. Many-a-times, the IPOs are priced lower than what the market believes should be the actual stock value.
Once these shares get listed in the market, they attract more investors who want to capitalise on this value gap, driving demand for shares in the market. At such times, investors who got shares during the IPO process can offload them to gain a quick buck. Recently, many stocks have seen more than a 100% jump in share prices on the listing. As the demand soars, these gains further extend, creating a windfall for those who stick to their investment.
Many examples have shown that a manifold jump in stock price is possible even in the short term following the IPO: IRCTC, IndiaMART, InterMESH, Affle India, and so on are some of the stocks that have created massive wealth for IPO investors in a relatively short span.
Riding the growth
The other reason to invest in IPO is capitalising on the potential growth journey of a company in the long term. Usually, when companies launch IPOs, they are in their early growth stage. If you manage to spot a company with a robust business model, good revenue stream, and capable management, it can potentially prove to be a multi-bagger for you. That is, early investment in such companies creates wealth for future needs.
Many examples inspire such a story. Reliance Industries, Amazon, Infosys, or Asian Paints started small and now command the lion’s share of business they operate in.
Beware of risks
Picking the right stocks is extremely important under IPOs. Not all companies that enter the Stock Market are booming businesses; some crumble under the expectations, and sometimes due to adverse market conditions. There are various examples of such absolute failures, viz., Reliance Power.
Always be aware of how much risk you can take. If you are a conservative investor who cannot see your investment going in the red, investing in IPO may not be the right option for you. Moreover, do not invest everything you have in stocks, especially IPOs. Diversification is essential in investing.
While investing in IPO, following a few smart tips can be fruitful. Understand why a company is raising money; it may not be a good idea if it is for anything other than expanding their business. Also, be extra careful if companies are tiny or have too much euphoria around an IPO. Have patience, see how it performs after listing, then reach for your wallets.
ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.