There are many reasons for investing in an IPO (Initial Public Offering). The most common reason of all is to generate capital quite fast. You apply for an IPO and get an IPO allotment of shares. By investing in IPO, you get to exit at the point of profit on a listing day. But to get more profited you need to be more accurate in your strategy and better at decision making.
Making money by investing in the IPO is not as easy as it sounds. There are a number of risk factors entailed to it and need serious attention from any investor. To help you understand the risks of investing in IPO here is an example: IPOs that come out with the public issue tend to give good returns. But over time price tends to get more aggressive, normally it is at the peak valuation where IPO starts under performing in the market. However, with careful planning, and better decision making you can avoid all these problems and win more money from the stock market.
- Top reasons to invest in an IPO
- Better shot at IPO allotment: If you apply in the retail quota of an IPO, you stand a much better chance to get an IPO allotment. The IPO allotment process is designed in a way that ownership is spread out as much as possible. That increases your chances of getting allotment in an IPO substantially. You can also check the IPO allotment status regularly.
- Retail Quota Discounts: Most of the latest IPOs offer a discount to retail investors. Today companies are allowed to issue shares to the retail investor at a discount. If you are applying in retail quota you automatically start off with an advantage.
- Wealth Generation with Equities: You have a good chance to grow your wealth with the company if you invest in a good IPO. This might not come instantly, but when you hold the shares with you for a longer period of time, then the returns are very good.
- Funding Productive Allocation: When an individual buys and sells shares in the secondary market, the money is contributing to productive investment. That is not the case in the secondary market investments as you are only buying from another seller. In most cases, an IPO can actually help an entrepreneur raise funds for the business.
- Reviewing your investment: IPOs see a lot of fluctuation in the process of review and vetting. Only quality companies come to the IPO market and this makes your job much simpler. As you don’t have to look at many companies that are listed and trade in the secondary markets. You can also start with marginal safety when you start investing in IPOs.
Top things to always remember while investing in IPOs
While investing in IPOs can be seen as an ultimate way to grow your money, there are certain factors that are needed to be reviewed by you as an investor. Here are some well-researched points that make the investment in IPOs risky.
- Not an overnight rich thing
If you are looking for something magical to happen over-night, do not invest in the IPOs. You must wait for enough for your IPOs to show some profits. There might be a chance that you may get an exit on the listing but like in any other case of equity investment it is recommended that you wait. Also, what is the bandwidth of your profit expectation? You don’t get fabulous returns overnight, things like that happen rarely.
- Don’t trust the issue price: The low issue price of IPO should not be your ultimate reason to invest in it. For evaluating a company’s worth it is important that you take into consideration other factors. The best way to look at it is by seeing the potential of the company that is like saying that a mutual fund NFO is priced at Rs 10 and is more attractive than the existing fund. So, don’t may cheapness of an IPO the reason to buy.
- Keep an eye on channels: Do not blindly invest in an IPO, it is very important that you talk to your broker, seek advice from other investment professionals, read the prospectus, and then move forward. You must have a good reason to buy an IPO.