Are IPOs safe for investing?
Short Answer
Investing in an IPO can be considered safe as there are no major Capital Loss risks and most companies that come up with an IPO price their shares at decent valuations which gives an opportunity to the investors get the shares at a discount from the market price. Most good quality companies also give good Listing gains and good returns in a short time. Some examples are, IRCTC, Route Mobile, Burger King, etc.
Detailed Answer
What is an IPO?
An IPO is a process through which a private turns into a public company by getting listed on a Stock Exchange, for example, NSE (National Stock Exchange) or BSE. The company sells some of its Equity shares to the investor in return for the capital that they raise from the IPO.
Advantages of Investing in an IPO?
Investing in an IPO has many benefits, some of them are mentioned below-
- Gets you early access to a company:
By investing in an IPO you are considered to be one of the early investors who invested in a company. IPO’s are generally priced reasonably and good companies are rarely available at the issue price or below, after the IPO. Some of the recent examples are- IRTCT, Avenue Supermart, Happiest Minds, etc. These IPOs were listed at almost 100% premium and even after 1 year have not been traded much higher than their issue price.
- Fair Valuation:
Stocks in the Secondary market (Listed on NSE or BSE) are highly volatile and the price keeps changing every second. Therefore it is very hard to evaluate their true value and invest at decent valuations. But in the case of an IPO, the issue price offered by the company is very reasonable as they want their IPO to get fully subscribed, hence companies charge fair valuations for their stocks. In this way, one does not overpay while applying in an IPO.
- Very few chances of Extreme Capital Loss- When a person is applying for an IPO the chances of major capital erosion or loss is very small as the IPO might get listed at a discount due to some bad market conditions, Eg “SBI Cards” but over the time good quality shares do recover and trade above their issue price within a short period of time. Whereas
- Full Money is refunded in the case of Non-Allotment- While applying for an IPO the total amount gets blocked in the investor's bank and if he/she is not allotted any shares then the money is unblocked and the full money is refunded to the investor. Therefore applying for IPOs can be considered as a risk-free investment.
Is investing in an IPO safe?
By looking at the above points it can be said that investing in an IPO is safe and comparatively safer than buying shares from the secondary market. There are no major capital depreciation risks and the complete money is refunded if one is not allotted any shares in an IPO. Here is a list of IPOs that were issued in the previous year-
As seen in the above chart out of 12 IPOs, 11 IPOs are trading above their issue price, and most of the good companies such as IRCTC, Happiest Minds, Route mobiles, etc have given more than 300% returns in the time frame of 1-2 year. Only 1 IPO in the last 2 years has failed to go above the issue price which is “Ujjivan Small Finance Bank”. This shows that good companies have a very high chance of performing well after it gets listed, hence one should definitely consider investing in an IPO.
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Discussion (4)
I invest through Zerodha and it works well for me.
I have invested through Zerodha in the Past and it works perfectly well. Brokers like SBI etc are also good though
IPOs are 100% safe for investing. You just need to make sure that you are investing through the right brokerage !
I want to invest for short time so please let me know which IPO will give positive gain? Selling the IPO shares on the first day of its listing could get you considerable postive gains. But there is a higher chance for the prices to rise and even fall if you wait for a more extended period.
IPOs seem the modern money multiplying investment, Should you invest? Good quality IPOs are great options for investors when considering investing in an IPO. However, IPOs should not be taken as money multiplier instruments and invested in. Multiple IPOs have performed badly due to extremely high valuations and poor financials. Hence, it is important to evaluate the financials of the company before investing in them.
What is the minimum and maximum for investing in an IPO? The minimum and a maximum number of shares are defined in Lots in an IPO. The minimum number of Lots that a retail investor can apply in the Retail Segment (RII) is 1 Lot and the maximum number of Lots that can be applied should be less than 2 Lakh Rupees. On the other hand, if one wants to apply for more than 2 Lakh rupees then they can apply in the NII (Non-Institutional Investor) category where the minimum amount for investment is 2 lakhs and the maximum amount is not capped.
Is IPO investing good for new investors? IPOs can be a good option for beginners as they provide an opportunity to get the shares of good companies at an attractive price. Though IPOs can provide good listing gains and quick profits, good companies can help you to create massive wealth in the long term.
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Ishwinder Singh
Friday, August 6th, 2021, 4:41 AMIt works well through other brokers like upstox as well.