If you are a regular share market investor, you must know that there are two ways to buy shares of companies. First is through the primary market, when a company floats its Initial Public Offering (IPO). However, the allotment of shares isn’t guaranteed in the case of an IPO. The allotment is finalised only through a lottery system if an IPO is oversubscribed.
The second method to buy shares is through the secondary markets. You can place buy and sell orders any time during the market hours. But do you know there is one more way to buy a company's shares even before it announces its IPO?
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Yes! This is possible through pre-IPO investing. Keep on reading to know more about pre-IPO investing and its benefits.
Pre-IPO investing refers to investing in the shares of a company before it goes public through an IPO. An IPO is when a company releases its shares for public sale for the first time. However, some companies sell a portion of their stakes to eligible investors even before an IPO. This is usually done to raise capital and create an investor base before going public.
Earlier, pre-IPO shares were only sold to High Net-worth Individuals (HNIs), banks, private equity companies, and other institutional investors. However, now, with the availability of Demat and trading accounts, all types of investors can invest in the shares of pre-IPO companies. But the question is, why should you invest in them?
Below are a few reasons to invest in the shares of pre-IPO companies:
One of the most compelling reasons to invest in pre-IPO companies is that they have the potential to provide very high returns. These are relatively younger companies or start-ups that may expand to greater heights. As a result, you stand a chance to gain unlimited profits as the company in which you have invested grows.
For example, you can invest in new-age companies, such as EV-manufacturing companies, drone-manufacturing companies, and technology companies, during the pre-IPO stage as these companies have huge upside potential.
Another reason to invest in the shares of pre-IPO companies is that they are not as volatile as those traded on the stock exchanges. It’s because the values of the shares of pre-IPO companies aren’t impacted due to events like a financial crisis, demonetization, and pandemic. Their performance depends only on how the issuing company performs.
However, you need to understand that pre-IPO investing is not risk-free. A start-up business may fail entirely or may not be able to grow as much as expected. And in such cases, pre-IPO investors suffer huge losses.
As we have discussed above, the allotment of shares in the case of an oversubscribed IPO isn’t guaranteed. One way to get guaranteed shares of promising companies is to buy them during the pre-IPO stage. You may have to pay a bit higher for this, but you will make a lot of profit when such companies are listed on the stock markets.
Conversely, you can profit by offloading your shares when an IPO is launched. For instance, if you have bought shares of a company for Rs. 120 per share during the pre-IPO stage, and after a year, the company floats its IPO at Rs. 180 per share. You can offload your shares at this time and get a return of 50%.
You can get company shares at much cheaper rates during the pre-IPO stage than the IPO stage. You may have to pay an even higher price to buy them from the secondary markets. It’s because the companies offer high discounts during the pre-IPO stage to bulk investors. You can even negotiate with the management team on the table.
Pre-IPO investing is a helpful method to get shares of promising companies during their early stages and earn potentially higher returns. However, like any other investment avenue, it involves certain risks and requires due diligence.
Even for pre-IPO investing, you will need a Demat and trading account. If you don’t have a Demat account, you can open it for free with Motilal Oswal and enjoy many exciting features.