An IPO is the process of an unlisted company offering its shares up for the public, thereby getting listed on a stock exchange. Lately, the Indian stock market has been witnessing a steady increase in the number of companies launching IPOs or Initial Public Offerings. And needless to say, retail investors are flocking to the market to make the most of the IPOs on the calendar.
If you too are among the many investors who are keen on taking advantage of upcoming IPOs, it is important to have a plan in place. Most individuals focus a great deal on their market entry, but often overlook the importance of having a solid exit strategy in place. In case you’ve been guilty of the same mistake, it’s never too late to rethink the right manner in which you can sell your holdings and optimise your gains.
To help you with this, here’s a closer look at some of the most common IPO exit strategies that can maximise your gains and minimise the risk of losses.
You typically bid for an IPO once the issue opens. Generally, most IPOs have a window of 3 to 4 days during which investors can apply. Once this window closes, the process of IPO allotment begins and you may be allotted shares. This is then followed by the listing date, which is when the shares of the company are listed on stock exchanges.
Typically, stock prices tend to change rapidly on the listing date. They may either skyrocket or plummet. If you anticipate the stock price will shoot up on the listing day, you can cash in on the listing gains by using the IPO exit strategy called flipping. Flipping is the process of acquiring shares in an IPO and then selling them immediately on the listing date — which is the very first day the shares are traded publicly.
If the stock prices increase significantly, you stand to gain a fair share of profits. For instance, say you are allotted 1,000 shares in an IPO at Rs. 120 each. And on the listing date, the share prices increase to Rs. 180 per share. In this case, you can gain around Rs. 6,000 by simply flipping your holdings.
That said, market regulators and experts tend to advise against adopting this strategy, because if a significant number of investors practise flipping, it can pull the share price down.
If you expect that the shares in an upcoming new IPO will perform well over the years, it may be a better idea to hold it in your portfolio for a few years rather than flip it on the listing date. This is a long-term exit strategy that you may also know as the buy and hold strategy. It works best for shares that are fundamentally strong and perhaps undervalued.
Keep in mind that if you adopt the long-term investing strategy, your holdings will witness several market cycles. The prices of the shares may dip, rise, and dip again as the market goes through bullish or bearish phases. But eventually, the prices will stabilise for fundamentally strong companies. And if the shares were originally undervalued, they may witness correction and to reflect the true value of the asset.
This could lead to significant gains when you exit your position. For instance, say you purchase 10,000 shares of a company via an IPO at Rs. 100 per share. 10 years later, let’s say the share price of the company increases to Rs. 229. This will give you gains of Rs. 129 per share, or a total profit of Rs. 12,90,000.
Keep in mind that if you adopt this exit strategy for an upcoming IPO, you will have to account for long-term capital gains and the taxes thereon though.
When you invest in an upcoming IPO, it may happen that the stock prices plummet initially on the listing date. This could lead to a loss at the time of listing. Some investors choose to bear this loss and sell their holdings, and then reinvest in the company in the secondary market at a lower price.
For example, say you applied for an IPO and were allotted 1,000 shares at Rs. 450 per share. On the listing date, the price of the shares drops down to Rs. 380. You can choose to bear the loss of Rs. 70 per share and sell your holdings. And then, you can reinvest in the company at lower prices. You can then continue to hold the shares for several years, till the price increase is enough to deliver significant gains.
This strategy can be helpful if you want to offer some of your capital gains with losses and bring down your tax liability. Experts refer to this technique as tax loss harvesting. But if you follow this strategy, ensure that your portfolio can withstand the losses you will face.
Before you decide on an exit strategy for a new upcoming IPO, you need to pay attention to the following things.
An IPO exit strategy is as important as the entry plan. Remember to invest in an IPO only after you have a comprehensive plan in place, and avoid applying for IPOs on an impulse. And before you go ahead and invest in an upcoming IPO, you need to first have a Demat account. If you don’t have one yet, visit the Motilal Oswal website and open a demat account today.