Initial Public Offerings (IPOs) let companies raise funds by issuing new shares. After an IPO, stock exchanges let investors trade private business shares. Expanding, repaying debt, and brand recognition are reasons organisations go public. Though risky, IPO investing involves understanding of the company’s potential and market conditions.
This article helps you understand IPO risks and make sensible investment decisions.
What is an IPO?
A private company becomes publicly traded by offering its shares on a stock exchange in an IPO. Institutional and ordinary investors can now buy equity and help the company grow, increasing ownership.
To generate large amounts of capital for company expansion, research & development, or balance sheet deleveraging, companies go public. Through IPOs entrepreneurs and venture capitalists can sell their shares.
Regulatory review, investment bank underwriting, and price fixing make IPOs complicated. Supply and demand determine the stock’s price after listing. Based on the company’s market strategy and success, this creates opportunities and threats.
Also read: What sets an SME IPO apart from a regular IPO?
Why invest in an IPO?
IPO investors benefit from early growth. Buying shares at the IPO may help investors profit from company growth. Early IPO participation can yield high returns as the firm grows and gains market share.
However, investing in IPOs is also risky. IPO stocks often see considerable price changes in the first several months. Overvaluation, where the original price does not reflect the company’s genuine value, may also risk losses for investors. Before investing in an IPO, research the company and its fundamentals.
| Benefits | Risks |
| Early access to potentially high-growth stocks | Stock price volatility |
| Opportunity to buy at initial offering price | Risk of overvaluation |
| Potential for long-term gains | Uncertainty regarding company performance |
How to invest in IPO?
The table below outlines the main steps for investing in an IPO, including company research and performance tracking. By following these steps, investors may make informed judgements, choose the right company, and monitor their assets. Understanding each phase is crucial to managing risks and maximising returns during the IPO process.
Learn more about: NFO or IPO – What do you think is the better option?
| Steps | Description |
| Step 1: Research the IPO | Review the company’s finances, business model and industry trends. One should read the Security and Exchange Board of India or SEBI- filed Red herring prospectus for details on the company finances, growth strategy, and funding goals. This prospectus is crucial for understanding IPO risks and prospects. |
| Step 2: Open necessary accounts | You’ll need both a designated bank account and a Demat-trading setup with a Depository Participant (DP), such as a bank or brokerage. Opening these requires your PAN card, proof of address, and other relevant documents. The Demat stores your securities electronically, while the trading facility enables buying and selling. Without these essentials, you won’t be able to invest in or trade IPO shares effectively. |
| Step 3: Apply for IPO shares | Apply for the IPO through your bank’s ASBA (Application Supported by Blocked Amount) facility or use your UPI ID. The required amount will be blocked in your account until the final allocation is determined. |
| Step 4: Place your order | Submit your order in lots, as specified by the company, and within the set price range. You can adjust or revise your bid before the IPO closing date, giving you flexibility to manage your offer. |
| Step 5: Allocation of stocks | If you are allocated shares, they will be transferred to your Demat account. If the allocation doesn’t happen, the blocked funds will be released and become available in your bank account again. |
| Step 6: Monitor IPOperformance | Subsequent to the acquisition of shares, monitor the stock’s performance, market conditions, and company news. Ascertain whether the asset should be retained or disposed of in accordance with your investment strategy. |
Key factors to consider before investing in IPO
- Corporate valuation: Assess the integrity or inflation of the company’s valuation. This can be determined by examining the organisation’s financial statements, revenue projections, and competitive landscape.
- Market conditions: Evaluate market sentiment, as the performance of an IPO is frequently linked to broader market conditions. A weak or volatile market could potentially undermine the post-IPO performance of a robust company.
- Lock-up periods: Lock-up periods discourage insiders and early investors from selling shares quickly after the IPO.A large sell-off once the lock-up arrangement expires could hurt the stock price.
Learn more about: Calculating company valuations. Everything there is to know
Navigating the uncertainty of IPO investing
- Market volatility: Unwary investors can lose a lot of money in the first months of an IPO due to stock price swings.
- Absence of historical data: IPOs lack long-term performance data, unlike established companies, thus investors cannot adequately assess their future risks. Investors must rely on optimistic and inadequate financial disclosures.
- Higher return potential: Investors are drawn to high return potential, but these gains are not assured and carry high risk.
- Risk Mitigation: Investors should analyse, diversify, and plan an exit to avoid market volatility.
Conclusion
IPO investing has risks and rewards. Early entry to high-growth prospective companies can yield large profits, but volatility and lack of historical data need care. Investors can reduce uncertainty by researching each IPO, comprehending the risks, and diversifying their portfolio. In conclusion, IPO investments should be planned to maximise returns and minimise risk.
FAQ’s
- How can I invest in an IPO?
IPO investors must open an account with a brokerage that offers them. Do IPO research on the company’s finances, industry and growth prospects. When the IPO opens for subscription, your broker can register you for shares, but allocation may be limited. There will be public trading and allocation of shares. Your investment can then be managed according to market conditions.
- What is an IPO and how does it work?
Initial Public Offerings (IPOs) allow investors to acquire and sell private company shares on the stock exchange. Before listing, the company must be regulated, underwritten, and sent an initial share price. IPO investors buy shares and grow with the company.
- What are the risks of investing in an IPO?
Initial trading phase stock values can fluctuate substantially, making IPOs hazardous. The company may be overvalued, which could cause losses if the stock price drops. IPOs long term potential is harder to assess without prior performance data. Investors doubt the company’s future, and insider selling after the lock-up period can hurt stock values.
- Are IPOs a good investment?
Individuals willing to accept risks for larger rewards may invest in IPOs. If a company performs well, early stock access might be profitable. Many IPOs fail owing to market instability or underperformance. Research the benefits and downsides to make informed IPO selections.
- How does one evaluate an IPO before investing?
Before investing in an IPO, assess the company’s finances, growth, and industry competitiveness. Its prospectus describes its long-term business strategy and financial use. Assess the company’s value and market conditions to determine if the IPO price is appropriate. Please examine the management team’s experience and the hazards listed in the filing documents to make an informed judgement.
