“If you can correctly determine the company’s future growth, you can generate significant wealth from IPOs. IPOs offer a way to participate in the stock market with substantial risks, leading to substantial gains or losses. Many times investors wonder “if investing in IPO is good or bad”. Continue reading to know the answer. Here, we will provide comprehensive insights into IPO investments’ advantages and disadvantages, which will help you make the correct decision.”
When reputed companies decide to go public, Investors get excited. The media promotes the brands and attracts every one toward the brand. Companies transition to the public for various reasons, such as expanding their operations, conducting research, and developing more. Therefore, when the company gets rapid growth and needs money to meet its requirements, it issues IPOs. They indicate their successful performance to date.
However, it is only a good idea to invest in any company’s IPOs by conducting thorough research about the company.
Let’s explore the myths about IPOs among investors, the factors you must keep in mind while investing in IPOs, and understand whether an investment in an IPO is good or bad.
Also read: IPO Investing Strategies: How to Evaluate and Select Upcoming IPOs
What is an IPO?
When a company offers its share to the public for the first time, it is called an Initial Public Offering (IPO). Here, private companies transform into publicly traded entities. They issue shares to the general public for the first time.
Before issuing IPOs, the shareholders of the companies are founders, venture capitalists, or angel investors. After issuing the IPOs, the non-institutional investors, individual retail investors, and qualified institutional investors become the shareholders.
Now you know what an IPO is, let’s find out its pros and cons that will help you to understand whether Is it good to invest in an IPO.
What are the Pros of Investing in IPOs?
Let’s have a look at the Pros of IPOs to know, Is IPO good or bad:
1. More liquidity
When you buy IPO shares, you can sell them in the secondary market after the company’s listing. Secondary market trading is highly liquid for the stock because of its value determination by supply and demand.
2. Opportunity for listing gains
There is a high possibility of earning listing gains by Investing in IPOs. If the trading price of the stock exceeds the buying price on the listing day, you will get high profits.
3. Wealth accumulation
Participating in IPOs of those companies that will grow in the future will help you generate wealth. If the company undergoes long-term growth, the value of the stock can go up, resulting in high profits for investors.
4. Portfolio diversification
When you Invest in IPOs, it adds diversity to your portfolio as the stocks of new companies. It enhances your portfolio diversity and reduces overall risk while balancing your investment holdings.
5. Cost-effective
IPO follows the Application Supported by Blocked Amount (ASBA) feature. In this feature, the amount is debited from your account after the allotment of shares; otherwise, the bank will block the amount. You earn interest on the amount, which makes IPO investments economical.
What are the Cons of Investing in IPOs?
Another way of finding if investing in an IPO is good or bad is by knowing the cons of IPOs. So, let’s have a look:
1. No guaranteed share allotments
Applying for IPOs doesn’t mean you will get the allotment. Many times, it is seen that the availability of IPO is less than the demand. In such cases, many individuals still need to get the allotment. Such companies conduct a lottery to find the lucky applicant who will get the shares.
2. High price volatility
As there are, the fluctuations in share prices happen during the initial stage of IPO because of the new listing of the company and investor’s sentiments. This volatility results in a substantial price decline, which causes potential listing losses. Moreover, high volatility might prompt regulators to restrict trading activities which negatively impact liquidity.
3. Limited historical data
Historical data is insufficient for the newly listed companies, making tracking their performance challenging. This limited data will make it difficult to decide whether is ipo good or bad.
4. Risk of overvaluation
IPO share price depends on industry trends, demand, and future growth possibilities. There is a massive risk of overvaluation of stocks during their IPO launch due to the surge of IPOs. This may result in losses to investors when the market corrects itself, and share prices face a reduction.
Myths about IPO
Various myths prevailing among investors raise the doubt of “investing in IPO is good or bad”. Let’s understand the myths one by one:
1. Misconception 1: If the public is excited about an IPO, You should invest
Investing in an IPO based solely on positive attention can be misleading. Very high valuations show an unfavorable risk-reward balance at existing price levels. Also, the company’s need for a proven growth track and the competitive market landscape can affect the IPO’s performance, making it hard for investors to decide whether investment in an IPO is good or bad.
2. Misconception 2: IPO investments always yield higher rewards than waiting to invest
New IPO issuing companies don’t need to be high-risk and volatile. There are mixed financial results from IPOs, with many companies showing no long-term success. The growth predictions attract attention to IPOs, and higher valuations can be a problem during economic slowdowns when investor sentiment turns risk-averse.
3. Misconception 3: Only the stable companies issue IPOs.
The IPOs have financials, but the stability of future growth is still uncertain. The future of the company depends on global growth, tariffs, government regulations, and economic cycles, and these factors are beyond the control of the companies. This further leads to confusion about whether is ipo good or bad.
4. Misconception 4: Only individual investors are awarded IPO shares
The facts show that Institutional investors and fund managers primarily purchase IPOs. Investment bankers allocate IPO shares to those investors who have longer time horizons. It discourages quick selling. This leads to individual investors waiting for the secondary market to buy shares after the IPO.
5. Misconception 5: Investing in an IPO means you are the first shareholder
IPO investors are the first public owners of the company shares, but they are only some of the first to get access because companies already have many investors before IPOs. Also, there can be a difference between the IPO offering price and the price an individual investor pays when the shares start trading on the exchange platform. This is why investors are still wondering if investment in IPO is good or bad.
What should you Consider before Buying a Company’s Initial Public Offerings?
Now that we have debunked some common myths, you might have cleared the doubt related to “investing in IPO is good or bad” to some extent. Let’s delve further into understanding “Is it good to invest in IPO” by knowing some essential points to consider while buying IPOs.
- Know your investment purpose: You must know why you are planning to invest. Only invest if others are doing it or only for listing gains. Remember that your investment must align with your financial goals.
- Understand the business: Understanding the company’s business model and researching its operations before buying an IPO is essential. Invest in businesses with high growth prospects in the short and long term. Such companies usually have promising futures and yield profitable returns.
- Examine the company’s background: You must delve into the company’s history, product/service performance, management stability, qualifications of promoters, etc. Invest in stable companies and ignore those with a doubtful track record.
- Check financials: When you Analyze past financial data it provides insights into the company’s future. You must analyze the debt-equity ratio, cash flow statements, and earnings per share. Now, compare it with industry standards and make intelligent decisions.
- Assess associated risks: The financial examination can help you determine the involved risk in the company’s IPO. You must explore the Draft Red Herring Prospectus (DRHP) to know all the risks associated with the investment.
- Consider grading: IPO’s grading offers additional insights, but good grading only guarantees successful performance sometimes.
Final words: Investing in IPO is good or bad?
Talking about whether Is it good to invest in IPO, you must remember that IPOs are a mixed bag based on your approach. You will get a positive experience if you conduct proper research, carefully consider parameters, and make informed decisions. Conversely, it can give you huge losses if you invest only due to hype from the company or media.
Before jumping to the conclusion about whether Is it good to invest in IPO, you must remember that IPO investments are highly volatile and have significant risks. While there are numerous benefits to investing in IPOs, it requires hard work in analyzing data, credentials, and other relevant factors. You must have a clear vision of your investment goals, whether you want short-term listing gains or to hold your investment for the long term.
Ultimately, IPO investments suit high-risk tolerant investors. Also, those investors who put in the effort and research to make successful decisions can profit. In short, by collecting information and staying careful, you can get success in IPO investment. Hope, now you have clearly understood, is ipo good or bad.
Investing in IPO Is Good or Bad – FAQs
What points should I consider before buying an IPO?
Ans. Before buying an IPO, you must research the financials of the company, its business model, background, the associated risks, etc. You will surely gain capital if you are well-informed and make informed decisions.
Please guide me Is IPO good or bad?
Ans. Ipo Investment can be highly risky and volatile, so you must avoid getting into the trap of media hype about the company and make an investment. To determine if the particular IPO suits your needs, consider various parameters and conduct thorough research.
Are Initial Public Offerings always give profit?
Ans. Gaining a profit or losing the invested money depends on the degree of your efforts. You will get a profit if you research well and make wise decisions. The people who get the losses solely invest due to the company’s hype.
How long can the public invest in an IPO?
Ans. Usually, the IPO remains open for subscription from 3 to 10 days. If the book-building issue occurs, it is reduced to 3-7 days. In case of revision in the price band, it can be extended to 3 more days.
Tell me the minimum amount for subscriptions for investors.
Ans. As per the SEBI, the minimum amount for subscription for individual investors is 35 % of the IPO. For non-institutional investors, it is 15%, while for qualified institutional investors, it is 50%.
