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Why are Investors Interested in IPOs

Why are Investors Interested in IPOs?

Investors get interested in IPOs for two reasons. Firstly, it gives them the access to a new company which is hitherto unavailable in the market. Secondly, investing in an IPO gives you the prospects of quick churning of money in the form of listing gains.

IPOs have a much larger role to play in the capital markets. There is a constant flow of funds that are come into the equity markets. To absorb that flow you need to have new shares coming into the market. If that does not happen then the money will go into the existing shares that are listed on the stock exchange and that will make the P/Es higher and stocks more expensive. This increases the risk of stock market corrections. IPOs bring new shares into the market and that can better absorb investor liquidity.

How IPOs Help Investors in Churning their Money

Post listing demand
Because IPOs are marketed aggressively, they tend to elicit good interest from the investors. Since allotments are not made fully in case of oversubscription, the left-out feeling leads to a lot of investors trying to enter the IPO on listing. This ensures a healthy listing and exit for IPO investors allowing them to churn money quickly.

Quick allotment
The entire allotment process is completed by the BRLMs in less than 10 days and that means the funds are locked in for a very short period of time. This also ensures that investors are able to churn their funds more frequently in a short period of time. Even assuming that they are profitable in 60-70% of the IPOs, it becomes a profitable proposition.

Power of ASBA
ASBA has made it possible for retail investors to invest without committing their funds for too long. They just need to block their funds in the bank account on application and the amount is debited only to the extent of the allotment on the allotment date. Till then the investor continues to earn interest on the funds in the bank account.

IPO funding
For most HNIs applying in the non-institutional quota, it is also possible to get funding for their IPO application. This allows them to leverage and gain more in the IPO process. Of course, the funding has a cost and that has to be factored in. But in case of healthy listings, investors make money even after factoring in the cost of funding.

Entry route to equities
For first time equity investors, this becomes a good method of getting familiar with the equity markets. Since IPOs normally go through a very strict process of due diligence there is extensive work done to check the back ground and antecedents of the company. That makes it much safer for small investors to invest in an IPO.

IPO versus secondary markets; which is a better choice

While equity as an asset class remains the same, there are three reasons for investors to look seriously at IPOs as an asset class

Due diligence
The problem of choice is much less than in the secondary markets. When you buy in the secondary markets, you are required to do your own diligence on the financials and the investment attractiveness of the company. In an IPO, a large part of that job is done by the BRLM as part of the issue.

Attractive pricing
You tend to get IPOs at attractive prices, especially in case of mid cap issues. We have seen that in the past. That is because; companies and the BRLMs are keen to ensure that shareholders who apply in the IPO make money as it enhances their reputation. This also works in favour of the IPO investors.

Diversify risk
IPOs also offer a good diversification to your equity portfolio. Many of the IPOs are from sectors that get good value at the current point of time. That momentum works in your favour.

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