Is IPO investing good for new investors?

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.

Tagged With: initial public offeringipo investingequity investinglisting gainsprimary marketstock investing
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 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.

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.

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.

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.

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.

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 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.

Are market highs good to invest in Equity mutual funds?

Understanding the relative position of the market, the absolute values do not matter much. What matters is what is the earnings multiple, currently the market is trading at, popularly captured by a metric called P/E ( Price to earnings).

What are good or best stock market books for beginners?

There are plenty of books such as "Everything you wanted to know about stock market investing", "Stock to Riches: By Parag Parikh", "The Intelligent Investor: By Benjamin Graham (This one tops the list of best-investing books)" and many more.