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.
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?
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.
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.