IPO is the process by which a company decides to publicly offer its shares. It stands for Initial Public Offering. It is a significant milestone for a company as it signifies it is growing and expanding its business. IPO is growing as a popular way of investing for all kinds of investors. Through IPO, a company gets a permit to trade in the stock exchange.
Before knowing about the risks and rewards of investing in an IPO, you should understand why IPOs are released. There are multiple reasons related to it:
- Raise Money: IPO provides companies with a wonderful opportunity to raise funds which can be used for various purposes like expansion, Research and Development, debt repayment, and acquisitions.
- For Providing liquidity to existing shareholders: IPO provides more liquidity to shareholders including promoters, employees, early investors, etc by allowing them to sell a portion of their holding at any time.
- Brand Visibility and Credibility: A public listing can promote the brand visibility and credibility of a company. As an investor, we usually like to invest in companies that are listed on the stock exchange instead of those that are not. This is because it can be easier to trade shares in listed companies. Public listing increases the reputation of a company.
Several other reasons include Employee benefits, competitive positioning, and Risk Diversification.
Benefits of Investing in IPO:
- Listing Gains
Listing gains is one of the best things that happens to investors. You can get a significant benefit in just one day. When a company applies for an IPO, it sets a particular price for buying the lot. If the share price of that IPO trades higher than the price when applied for IPO, that particular gain is called Listing Gain. In 2023, Tata Technologies IPO arrived in IPO and returns around 140% listing gain in listing day.
- High Growth Potentials
You can avail of great benefits by applying in the IPO of a company having high growth potential. In the early stage, High-growth potential companies provide investors with a wonderful opportunity to invest their capital in the growing trajectory of the company. Successful IPO investments in these companies can yield significant returns as they expand their market operations.
IPO investments in high-growth potential companies often provide exposure to innovative and disruptive industries, allowing investors to tap into new market segments and emerging technologies.
- Liquidity
Once you are allotted shares in an IPO, you will have the opportunity to buy and sell the shares anytime in the secondary market, providing you liquidity. You can even sell your shares on listing day itself.
- Diversification of Investment Portfolio
Diversification is a key tool that you need to follow with your investment portfolio. You can diversify your holdings by adding shares through IPOs of young potential growth companies to your portfolio. It will make your investment strategy stronger which will reduce the risk that is associated with a particular sector.
- Participating in a company’s growth story
It is said that if you will spread happiness, you will get happiness. The same happens in IPO investments. If you are investing in the growth of a company, it means you are growing too. Through IPO, you can join this growth early and enjoy the journey.
Read More: Learn how to apply for an IPO
Risk of Investing in IPO
We should also be aware of the risks associated with investing through IPO. We can see significant gain through IPOs in a very short period but as said “Quick Gain is not always fruitful“. Here I am introducing a few precautions an investor needs to take before investing in any IPO:
- Volatility
During the early days after the IPO listing, the share prices can experience huge volatility. This market volatility can be the primary risk of investing in an IPO. Various factors like demand and supply, market sentiments, and economic conditions are some factors that generate volatility in the share price. Due to this volatility, share prices when purchasing through IPO can drive significant profit or loss for investors.
- Lack of Historical Data
Companies newly going to be listed through IPOs generally do not have any historical record of financial performance. Due to a lack of proper data, investors are unable to analyze the strength and stability of the company. This can be a risky situation for investors due to a lack of proper data. Proper data is needed before assessing the fundamentals of the company.
- Disappointing Performance
Not all IPOs usually perform well in the market. There are occasions when companies don’t meet the expectations of their investors or experience hurdles in carrying out their business strategies.
Putting money into an IPO that’s not performing well can lead to financial losses or minimal profits compared to what was initially put in. That’s why it’s really important to do your homework thoroughly and check things out before diving into any IPO. This helps lower the chances of it not doing well.
- Lock in Period
After the IPO, shareholders are prohibited from selling their shares during a specific time called the lock-in period. Once shareholders complete the lock-in period, there is a possibility that the share price will decrease due to a sudden increase in supply. This sudden downfall in share prices can result in heavy losses for investors.
Tips for Investing in IPO
If you have decided to invest in an IPO then before investing you must follow certain things that will assist you in making better decisions:
- Research the company and its promoters before applying for any IPO. You should be aware of the financials and records of the company. Company profits and revenue should increase quarterly.
- You should avoid investing in a single IPO. Diversify your investment is the best choice to avoid sectorial losses.
- Before investing in an IPO, You should be aware of the sector to which your company belongs. Try to invest in the growing sector. Avoid investing in those sectors that are lagging with the trend.
- IPO regulations can change over time. These regulations can impact the process and requirements for the companies going public. You must be aware of the regulatory updates that may affect your IPO investment.
IPO investment is always full of excitement. But as an investor, you should be aware of the risks and rewards where your investment is going.
