Should You Borrow to Invest in IPOs | Motilal Oswal

Should You Take a Loan to Invest in IPOs

To invest in an IPO or Initial Public Offering, an investor has to have a sufficient amount of funds so that good returns can be earned through investment. Needless to say, for any investment, funds need to be allocated to instruments so that your principal investment grows and develops into a substantial gain for you. Many investors find themselves facing an acute shortage of funds when they have to invest in an IPO, and hence, take loans to make good on investment. However, loans must be repaid on time and in full, and this must be considered. 

About IPOs 

An IPO is an Initial Public Offering that a company presents to the general public at large when it wants to offer shares of the company to the public. An IPO may be announced by a company, initially established as a private company, at any time. Typically, when a privately held company (with founder shareholders) has grown and developed to a large enough level to be listed on the stock exchange, it announces an IPO, and investors can make an application for an allotment of shares. You need to open a Demat account to invest in an IPO, and this is why there has been a rise in Demat accounts in the past year. 

IPO Investment Benefits

There are many advantages of investment that you get when you apply for an IPO and get an allotment of shares of a company. For instance, investors are awaiting, quite eagerly, the upcoming LIC IPO as they believe that it is a solid company to invest in. Due to the advantages of IPO investment, people are prompted to take loans to invest. Here are the benefits of investing in an IPO:

  • You get allotment of a significant amount of shares at a time. 
  • You have the opportunity to invest in a company that has shown a historically promising track record. 
  • You have the chance of getting shares allotted to you at a significantly lower price initially.
  • After allotment of shares through an IPO, a company listed on the stock exchange sees a rise in share prices, and although this is not a certainty, it usually is the case. 
  • You have the opportunity to invest in a company that has the potential of good growth in the future, and thus, returns are almost assured. 

Taking Loans for IPO Investment

Typically, you will find that HNIs (high net worth individuals) take loans to invest in IPOs. There are also other individuals who may opt for a loan for IPO investment. Generally, an IPO is offered without any notice and there is a time limit in which to apply. Individuals may wish to apply, but not have sufficient funds to do so. Hence, they seek loans. With IPO loans, investors pay partly (a margin amount) for shares and financial institutions fund the rest. Although loans help investors invest in more lots and grants investors high leverage to invest, taking loans means you are borrowing money. These are short-term loans and the repayment tenures last up to 3 months. Hence, if you wish to take a loan to fund an IPO investment, you must be sure that you have funds to repay it in time. You should note that you will have to pay interest (of almost 8%) on repayment of your loan. In case you don’t get the amount of shares you have requested allotment for, you will still need to pay the interest rate fixed by the loan, so you may lose out. 

Invest in IPOs

You may open a Demat account with a good brokerage, but may find that you don’t have funds to make investments. If you do have sufficient funds, then, by all means an IPO is a great investment. It is also advantageous for you to take loans, provided you are sure you can make repayments with interest and avoid any unnecessary debt. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account | Upcoming IPO | LIC IPO

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