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)
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Ishwinder Singh