Although the Initial Public Offering (IPO) is a long-drawn process for companies, they enable them to get access to some much-needed capital. This capital is then used by the companies to further their business objectives. IPOs are not only advantageous for the companies that issue them, but also for the investors as well.
By investing in the public issue of a company early on, you can get into the wealth creation process much earlier, which increases the chances of getting greater returns on your investment in the long run.
But then, what if you’re a trader and not an investor? Do you sit out of IPOs? Certainly not. In fact, there are many ways for traders to make money by trading stocks of companies that have just recently come out with their public issues. And that’s exactly what this article is going to be focusing on. Here are a few tips that you can use while day trading IPOs.
This is one of the best tips that you can use when day trading IPOs. The IPO price tells you a lot about whether the issue is overpriced or underpriced. In the case of an overpriced issue, the chances of the stock price tanking on listing day tends to be quite high. On the contrary, in this case of an underpriced issue, the chances of the company’s stock price rising on listing day tends to be high. You can use this information to plan your trades accordingly when attempting to trade on the listing day.
Since the volatility of IPO stocks tends to be quite high for the first few days of its listing, it is advisable for you to use an appropriate trading strategy to minimize the impact of wild price swings. And scalping is the perfect way to do that.
Scalping is a unique day trading strategy where you buy and sell a stock within a matter of a few minutes. Although the profit per trade is often quite low in this method, you can carry out multiple trades in quick succession to boost your returns. By buying and selling the IPO stock very quickly, you can effectively reduce the risk and the impact of volatility.
Every public issue of a company has a lock-in period of a few weeks from the date of the listing of the stock. During this period, anchor investors and other company insiders are not allowed to sell their shares in the secondary market. And so, insiders usually wait till the day this lock-in period expires to offload their investments.
This generally results in a downward spiral of the stock price due to the creation of immense selling pressures. So, if you wish to day trade IPO stocks, you should be aware of the date of expiry of the lock-in period. And on that date, you can either short the stock and buy it back by the end of the trading session or bottom fish the stock depending on your trading strategy.
Placing strict stop losses and targets can help you trade more efficiently. This holds true even when you’re day trading IPOs. Stop losses can help limit your losses if the trade doesn’t go in your favor. Meanwhile, setting target exit points ensure that you exit with the desired profits. Taking high volatility of IPO stocks into account, these two methods can help you stay grounded, while simultaneously increasing the chances of getting profits.
Day trading in IPO stocks is slightly riskier than other more well-established stocks. However, with these tips, you can make sure that you err on the side of caution while still getting to enjoy profits. If you’re interested in investing or trading in an IPO, ensure that you have an active demat account first. If you don’t have one, visit the website of Motilal Oswal to open a demat account instantly.