An IPO or initial public offer is an important journey in the life of a company. It is also an important investment decision for any investor in the equity market, particularly a new investor.
Investing in IPO is not only about owning a paper but also allows investors to come onboard as shareholders and join an entrepreneurial journey in a way. It also brings a company into public scrutiny, increasing its answerability multi-fold.
IPOs allow companies to raise capital based on their growth potential, while investors stand to make substantial gains even at an entry level, known as listing gains, while for good stocks, long-term investment from an IPO stage may result in sustained wealth creation. However, as every coin has two sides, investing in IPOs could also result in loss of capital for investors. It is, therefore, imperative to have an understanding about certain basic facts before one rushes to invest in an IPO.
For investing in IPOs, there are quotas for three categories of investors: institutional Investors, non-institutional investors (HNIs) and retail investors. These are there to ensure participation from all segments. Retail investors can bid up to Rs 2 lakh, and increased mobile accessibility and permission to apply through UPI has made this process easier.
Investors approach IPOs with two different strategies: long-term investing and listing gains. Investors following a long-term approach must look at the strength of the issue in comparison with similar, already-listed companies in the industry in terms of valuation, growth, earnings multiples, future opportunities, and other financial and regulatory nuances. DMart's IPO is a very good example, where investors saw a four times increase in the funds parked by them. The other category of investors that looks for listing gains wants to capitalise on the high demand for an issue to make a quick buck post-listing.
Both kind of investors should be careful about over-valuation of issues, as in such cases, the shares keep on falling after the listing and investors lose a portion of their investment. In many instances, such issues languish at significantly lower prices than the issue price for very long periods of time. There is a popular myth that IPOs are always priced affordably and are almost always beneficial for investors. Remember: this is not true. There is another risk for investors who borrow and invest in IPOs, they stand to lose even more in case an issue doesn't do well at listing, as they have to pay the borrowing cost in addition to the loss on their investments.
(R Venkataraman is MD at IIFL Securities)
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