Investors Get a Mixed Bag from the IPO Market | Motilal Oswal

Mixed Bag from the IPO Market

A private firm goes public via an initial public offering (IPO), making its shares available for purchase on a stock exchange or over-the-counter market. Although IPO shares may be a profitable investment, it can also result in significant losses for investors. Learn about the advantages and disadvantages of investing in upcoming IPO shares, as well as how to analyze your investment.

Advantages of Purchasing IPO

Purchasing an initial public offering (IPO) shares might be enticing. A block of common stock purchased at an IPO has the potential to generate massive financial gains decades down the road. In a few decades' time, even the yearly dividend income of a very successful firm might surpass the initial investment amount. Your investment helps the economy by allowing businesses that offer actual products and services to thrive and flourish. When the circumstances are correct, learning how to purchase upcoming IPO stock may provide extremely appealing profits.

Risks of Investing in Initial Public Offerings

Dealing with unpredictable price volatility is the greatest disadvantage for IPO investors. When the value of your stock drops, it might be difficult to remain involved. When stock prices fall, many shareholders lose their cool. Rather than evaluating the company and purchasing it appropriately, they rely on the market to provide them with information. However, they are oblivious to the distinction between inherent worth and price. Instead, think about whether look-through profits and dividend growth are increasing and are likely to continue.

Traditional Value Investing Approach to IPO Investing

In his book The Intelligent Investor, Benjamin Graham, the founder of value investing, advised investors to avoid all initial public offerings. What is the explanation behind this? During an IPO, the previous owners are aiming to raise funds at a premium price, so there's a slim possibility you'll be able to acquire your share for a lower price. Instead, he urged, wait for a business glitch that would cause the stock price to plummet in a few years, allowing you to stock up on shares at a bargain. Graham has a cautious, methodical approach to safety. It reduces your chances of being burnt, and the ordinary investor will likely benefit in the long term if they follow this rule.

How to Assess Buying an Initial Public Offering Stock?

If you've chosen to invest in an initial public offering (IPO), keep in mind the company's strengths. Consider the following questions:

  1. What are the competitive moats that keep the company safe? Is it protected by patents, trademarks, important executives, or any other distinguishing feature?
  2. What is the most probable explanation for this company's failure to develop at a fast enough pace to justify its price? What are the chances that such failures will occur?
  3. What's to stop another company from entering the market and undermining the favorable economics?

Take into account your own degree of familiarity with the company and how it is run:

  1. Would you feel safe owning this company if the stock market closed for the next five, ten, or twenty-five years?
  2. Is this business model and the company's financial base, in other words, viable? Is it possible that obsolescence will occur as a consequence of technical development or a lack of adequate capital?
  3. Will you be able to continue holding your shares if the stock drops 50% due to short-term issues in the business?

Before putting money down, conduct your homework on the firm and its potential. It may be tough to accomplish since the firm hasn't released much financial information to that time, but it's critical to your success.

Wrapping Up

When it comes to making a successful IPO investment, the odds are stacked against you. In comparison to the market, IPOs have a poor track record. They're often already well-priced. Figure out what you're searching for before you invest. Consider the possibility that you'll have to wait a long time for the appropriate chance at the correct moment. An IPO may provide such a chance, but more often than not, it will need discipline, timing, and investigation.

Frequently Asked Questions (FAQs)

  • What factors go into determining the price of an initial public offering (IPO)?

The process of calculating an initial public offering (IPO) pricing is difficult. It's determined by the main investment bank financing the IPO, and it's based on the firm's financial condition, similar company values, and the sales abilities of those who set the price.

  • What is the procedure for purchasing pre-IPO stock?

A corporation may sell discounted shares to private investors in the form of a pre-IPO placement before becoming public. Because they are privately traded shares, they are unregulated. They're also only accessible to authorized investors, which means that many ordinary investors won't be able to buy them. If you're asked to acquire pre-IPO shares, be wary of the risk of a con and do your homework.

Related articles: 5 Tips for Investing In IPOs | What's the big deal about IPOs | Clearing the confusion from IPOs | IPO in India- The future looks bright | Upcoming IPO

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