Why you Should Invest in an IPO?
There are different reasons for investing in an IPO. The most common reason is that
you can actually make money on listing so effectively you can roll you money quite
fast. You apply for an IPO, get the allotment of shares and exit at a profit on
the listing day. Is it really that simple?
While there are stories of investors making money in an IPO, there are also some
key risk factors to consider. For example, IPOs that come out with the public issue
in the initial phase of the IPO boom tend to give good returns. Over time pricing
tends to get more aggressive. It is normally at peak valuations that issuers tend
to get more aggressive on pricing and that is when IPOs start under performing in
the market. We have seen a lot more IPOs under performing in 2018 compared to IPOs
in 2015 and 2016, when post listing performance was relatively better.
5 Reasons to Invest in an IPO
Better chance of allotment
If you apply in the retail quota of an IPO, you stand a much better chance to get
an IPO allotment. That is because the IPO allotment process has been designed in
such a way that the ownership is as spread out as possible. That substantially increases
your chances of getting allotment in an IPO.
Retail quota discounts
Most IPOs give discount to retail investors. This is a recent development where
the company is allowed to issue shares to the retail investor at a discount. For
example, most PSUs do offer a discount of 5-10% on their issue price to the retail
investors. If you are applying in the retail quota, you automatically start off
with an advantage.
Wealth creation with equities
You get a chance to grow your wealth with the company, of course assuming that you
have invested in a good IPO. This may not happen on listing but if you are willing
to hold over a period of time then returns can be really attractive. For example,
if you had invested in the Infosys IPO in 1995, you would be sitting on a fortune
Funding productive allocation
There is a much larger reason for investing in an IPO. When you buy and sell shares
in the secondary market, you are actually contributing towards productive investment.
That does not happen in secondary market investment because you are only buying
from another seller. In the case of an IPO, you actually help an entrepreneur raise
funds for business.
Review makes it safer
Since IPOs go through a very rigorous process of review and vetting, only quality
companies come to the IPO market. This makes your job simpler as you do not have
to look at the hundreds of companies that are listed and trading in the secondary
markets. You start off with a margin of safety when you invest in IPOs.
Reasons for Not Investing in an IPO
Having seen the benefits of investing in an IPO, it is also essential to see why
one should not be investing in an IPO (wrong expectations to be avoided)
Don’t be a fly-by-night investor
Don’t invest in IPOs to become rich overnight. It does not work that way. If you
are lucky you may get an exit on listing but like in case of any equity investment,
you must give your IPOs time to deliver results. Don’t expect fabulous returns overnight
as it does not happen or only happens rarely. That is not sustainable.
Don’t go by issue price
Don’t invest in an IPO just because the issue price is low. An Rs.40 share is not
necessarily cheaper than an Rs.200 share. A company’s value has to be judged based
on how much wealth it can generate in the next few years. That is like saying that
a mutual fund NFO priced at Rs.10 is more attractive than an existing fund. That
is a wrong way to approach IPOs.
Do your channel checks
Don’t blindly invest in every IPO that comes into the market. Talk to your broker,
consult your advisor, read up the prospectus and then take a view. In fact, you
need to be very choosy about your IPO investments.