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Dont Let These IPO Myths Blindside You

29 Nov 2023

Introduction:

The IPO fever has undoubtedly gripped the Indian stock market ecosystem. More than 80 companies have already launched their Initial Public Offerings (IPO) till July 2023, with some providing more than 90% listing gains. With several more IPO awaited to hit the markets in the upcoming days, the time is ripe for investors like you to try your luck and make substantial gains.

However, you need to understand that not all upcoming IPOs are profitable. Blindly applying for every issue being launched can lead to significant losses. Also, you should not let certain myths or assumptions associated with IPOs influence your investment decisions. In this article, we have tried debunking some common IPO myths for your help. Continue reading.

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Common IPO myths

#1 – If a public issue is oversubscribed, it is a must buy

This is one of the most commonly heard myths among IPO investors. Most rookie investors assume that if an IPO has been oversubscribed, they should also subscribe to it. This can be highly misleading, to say the least.

There is no thumb rule as such that you must invest in an IPO if it’s already oversubscribed. It has been noticed several times that even the offerings that were oversubscribed by multiple times during the book-building process failed to deliver expected returns at the time of listing. The subscription status of an IPO in no way guarantees that you can make a profit by investing in it.

#2 – The grey market premium is a sure shot indicator of the listing gains

It’s a common practice among IPO investors to look at the grey market premium (GMP) to decide whether to invest in an IPO. The GMP refers to the price at which IPO shares are sold in the unofficial markets before they are listed on the stock exchanges. 

However, this is a speculation and not a fact. Although the GMP can be used to get an idea of the listing price of an IPO, it does not guarantee listing gains. The classic example is Easy Trip Planners IPO, wherein GMP indicated a listing gain of more than 70%, but the IPO got listed at only a 12% premium from its issue price.

#3 – If there’s so much hype around an IPO, it must be good

A new IPO creates a significant buzz among investors every time it is announced. Some IPOs create more than usual noise owing to the company’s popularity, IPO size, or other factors. But when there’s so much hype around an IPO, does that mean you should invest in it blindfolded?

Not at all. Do you remember what happened with the PayTM IPO? It created significant hype in the markets owing to its large issue size and aggressive marketing. Many investors got excited, and the IPO was oversubscribed within a day or two. However, it failed severely upon listing. The PayTM shares, which were issued at Rs. 2150 per share, got listed at a discount of around 10% and then dipped further as the day progressed. 

Thus, make it a rule to never invest in an IPO based on the market hype. Instead, look at the issuing company’s fundamentals, valuation, and prevailing market conditions to make an informed investment decision.

#4 – Applying from several Demat accounts increases the chances of allotment

This is one of the most common mistakes several IPO investors make. They open multiple Demat accounts with different stockbrokers and then apply for an IPO from each of their Demat accounts to maximise the chances of allocation. 

But you can apply for an IPO from only one Demat account in your name. If you have applied from multiple Demat accounts, all your applications will be cancelled, and you won’t be allotted shares. If you want to increase the chances of allocation, the best you can do is apply for an IPO from the Demat accounts of your friends and family members.

To conclude

Hope the information presented in this article will help you become a diligent investor, and you will make judicious investment decisions in the future. Rather than subscribing to every IPO hitting the market, your decision should be based on careful evaluation and analysis of multiple factors. With Motilal Oswal, you can open a free Demat account and invest seamlessly.

 

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Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | How does a 2 in 1 Demat Account work | Relying on Grey Market Premium Wont Always Yield IPO Profits | Types Of Demat Account & Trading Account

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