Is IPO investing good for new investors?
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- Updated On:25-Aug-2023
- Replies:2
Short Answer
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.
Detailed Answer
Is IPO investing good for new investors?
What is an IPO?
IPO or an Initial Public Offering is a process in which an unlisted company raises money by selling its shares to the common public. In this process, it also gets listed on the stock exchanges or the secondary market. After an IPO, a company transitions from a private company to a publicly owned company. This means you can buy and sell the shares freely as there is ample liquidity in the secondary market.
Recently after the Indian markets have rebounded from the lows of March 2020, a plethora of IPOs have hit the markets. In the year 2020, more than 10 companies went public followed by 51 IPOs in the first 10 months of 2021. Many IPO gave more than 100% listing gains to investors. With such exceptional returns in a very short period of time, IPOs have become one of the main attractions to investors. Let's find out whether you should invest in IPOs or not?
Are IPOs good for new investors?
IPOs have always remained a good way of investment for beginners. This is primarily because an IPO is the first opportunity to purchase the shares of an unlisted company. However, there are some risks associated with it as well. Let's look at some of the drawbacks of investing in an IPO.
1. Lack of past information about the company
It is challenging to find out the previous performance and profit structure of unlisted companies. Therefore, the only way to perform the fundamental analysis is through the RHP (Red Herring Prospectus) of the company. Companies can exclude certain threats and shortfalls about the company to paint a rosy picture of the company. This lack of information can be a major disadvantage to retail investors.
2. Rigid pricing
IPOs are typically in the form of a book-building issue. In a book building issue, companies tend to provide a price range to the investors for bidding. If you want to apply for an IPO, you will have to place a bid within the range. Most of the time, companies demand a significant premium for their shares in an IPO. In this case, you do not have any option but to apply at the asked price of the company.
These were some of the major drawbacks when investing in an IPO. However, there are some advantages of investing in IPO as well, they are:
1. Less Risk
IPOs are less risky when compared to purchasing shares from the secondary market. The pre-specified price makes the job easier to apply to an IPO for new investors. There are also many value-buy opportunities where you get to invest in a company at a significant discount.
2. Good Listing gains
With the increasing demand for IPOs, almost every issue gets oversubscribed, which results in good listing gains. More than 5 companies have doubled the investor's money on the date of listing in 2021. Some of them were Happiest Minds, Route Mobile, Sigachi Enterprises, etc. Similarly, if you apply for the IPO of good companies, you can generate massive wealth in the long run.
Conclusion
Looking at the benefits and drawbacks of investing in IPO, it is imminent that IPOs can be a good option for new investors. To begin with, an IPO gives the opportunity to get good companies at a good price, and also the risk involved is low. If you don’t receive any allotment, the full amount is refunded. This makes IPO investing one of the safest investment options when you are new to the stock markets.
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Discussion (1)
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.
An IPO or Initial Public Offering is where for the first time an earlier unlisted company sells new or existing securities and offers them to the public in the primary market.
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.
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.
When talking about the best stock broker in India, we cannot rule out Zerodha. It is the market leader in bargain stockbroking, is premised in Bengaluru, and accounts for more than 15% of total retail trading activity in the country. Mr. Nitin Kamath formed the leading brokerage firm in 2010 Kamath, and it now has a customer base of over 6 million.
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.
IPO prospectus is the document which gives information to the investors about the company statistics before they issue shares in public. It is mainly a 3 step process. For detailed description, read through the blog below.
There are many ways to check the IPO allotment status but Zerodha doesn't provide this facility on their website.** To check the allotment status you can visit the website of the registrar of the IPO**, for example, Link Intime, Karvy. With the help of a PAN number, you can easily check the status.
Discount brokers have gained a lot of popularity in the past couple of years. Zerodha is currently India's largest and most trusted discount broker which is also the best option for beginners. It has all the necessary qualities required for a good broker like low commissions, low-maintenance charges, high-quality trading terminal, etc.
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It is important to read the DRHP of the company before investing in the IPO. IPO's can often times come at inflated value as the company is trying to raise money for its operations by liquidating it's ownerships. Hence one should always do their own due diligence before investing in an IPO.