IPOs seem the modern money multiplying investment, Should you invest?

Short Answer

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.

Detailed Answer

The reason behind the IPO frenzy?

The Indian IPO markets have been raging hot since last year as companies line up to cash out in the latest stock market boom. India witnessed record IPOs in the year 2020 as well as 2021 because of the ample liquidity in the market. Some of the key reasons behind the rush of IPOs are:

1. High Liquidity in the market

The extremely low-interest rates in the economy push corporate and businesses to borrow at a lower rate and expand. Similarly, the retail investors shunned traditional investment instruments like the Fixed Deposits (FD) or Government Bonds in order to look for better returns. The stock markets captured their attention as the benchmark Indices (Nifty) had delivered extraordinary returns in the last 12 months.

Because of these reasons, companies rushed to take advantage of the retail participation who were flush with liquidity. Almost all the issues in the past couple of years were highly oversubscribed due to the excessive demand.

2. Stock market boom

As the liquidity-driven rally fueled the stock markets higher, more and more companies realized the opportunity and hopped on the IPO bandwagon. Investors, on the other hand, preferred IPOs compared to equity investing. The reason was, every second company provided extraordinary listing gains on the date of listing. This resulted in an IPO boom where every company which was waiting for a public issue, got an opportunity to cash out at a premium valuation.

Should you invest?

Even if multiple IPOs generated triple-digit listing gains, not all of them are the same. Some IPOs got listed at a discount and investors did lose a substantial amount of their capital.

Before investing in an IPO there are some parameters which you should check. They are.

1. Valuations

No matter how hyped an IPO is, ultimately investors should discount the financials of a company to ascertain its precise value. Multiple companies came out with insanely lofty valuations and failed to deliver adequate returns to their investors. Due to this reason, you should first match the valuation of the company with its share price to find out whether it is overvalued or undervalued.

2. Company Industry

Evaluating the industry of the company is important while valuing it with its peers. You should compare the valuation of the company with the peers of the same industry to come up with a judgment. Recently certain segments like the specialty chemical sector were in the limelight. This resulted in higher demands for these companies.

Conclusion

Therefore, to conclude, IPOs are a good way to begin your investing journey. But you should perform your due diligence and carry out your research on the valuations and pricing of a company before investing in an IPO.

You should also remember that the market condition also plays a major role in the listing of IPOs. If the broader trend of the markets is upwards, IPOs tend to list at a premium. Similarly, if the overall, market sentiment is negative, IPO also underperforms in such a scenario. The most effective strategy is to apply for IPOs of good companies and stay invested for the long term. This way, you are not looking for quick listing gains, rather you are looking at the big picture of investing in a fundamentally strong company. Therefore, it is critical to evaluate all the risks and rewards before investing in an IPO, and not look at them as a mere money-multiplying instrument.

Tagged With: initial public offeringindian stock marketsindustry analysisfundamental analysislisting gains
Categories: IPO Basics
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Related FAQs

How to find good companies as there are many publicly listed companies in the Indian stock market?

To find good companies out of the thousand companies listen on the Indian stock exchange, you can filter stocks on the basis of certain parameters such as Market cap, Debt to Equity, Dividend payouts, Revenue and Profits growth, etc. You can easily use an online stock screener to find out these stocks.

Why did some of the recent IPOs gave poor listing gains? Is the IPO craze over?

IPOs have been extremely popular lately as a result of increased retail participation, ongoing bull run, and massive listing gain opportunities. However, the Indian stock markets went through a minor correction which resulted in a muted performance of some IPOs. The market negativity coupled with the lofty valuations of some of the IPOs led to poor listing gains, but the craze might not be over.

Why did the Paytm IPO did not perform well after listing?

One97 Communications, the parent company of Paytm came up with the largest IPO in Indian history but failed to perform well. Firstly the IPO was too big for the retail investors to digest. Then the valuations were extremely high which led to the HNIs and Institutions avoiding the issue. All together the overhype in social media led to massive losses for the retail investors as the stock fell almost 40% in two trading sessions.

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.

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.

What is an IPO or Initial Public Offering?

IPO or Initial Public Offering is the process through which a private company goes public by offering its shares to the public for the first time.

Can NRI invest in Indian stock market?

Yes, NRIs can invest in Indian stock market. It is essential for the individual to check if he is considered as NRI or not according to the norms of the government. If yes, only then he can invest. There are also certain rules and regulations that must be followed.

Is it a good time to invest in stocks? Bullish Stock Market

There are several questions that one can ask your advisor. These questions include whether its good time to enter or exit the market? Should in exit from debt and move to FD? do I continue my SIP portfolio? and other such questions.

Is Paytm Money Safe and reliable Broker for Stock Trading & Investing?

Yes, it is completely safe to invest your money in the stock market using Paytm money App. In fact, PayTm has come up with stock broking services recently and trying to establish itself in the said field. And, to give tough fight to top existing players it has to keep its services up to the mark. Paytm Money made a big name in mutual fund investment industry and now it's time to see its performance in the stock brokers' world.

Can we sell IPO shares immediately?

In an Initial Public Offering (IPO) a company sells its shares to investors in order to raise money. As a retail investor, you can apply for an IPO from the primary market in order to get the shares offered by the company. Once the shares get listed on the secondary market, you can sell your shares provided you have received an allotment in the primary issue.