The entire nation is currently gushing over IPOs. Every day or the other, a new IPO is launched into the market. As many as 80 IPOs – both mainboard and SME IPOs combined – had hit the Indian stock markets by the end of July 2023. Some of them, including Drone Destination, ideaForge Technologies, and Utkarsh Small Finance Bank, have provided investors up to 90 percent listing gains.
In hindsight, IPOs seem like excellent investment opportunities. Rookie and experienced investors can invest in an IPO to gain high returns. However, they also have a few downsides, which is why a few people hesitate to invest in them. If you are one of them, you can read about the pros and cons of IPOs and decide for yourself whether they are worth investing in.
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Before we move on to the pros and cons of investing in IPOs, let’s discuss an IPO. When the shares of a private company are issued for public sale for the first time, it is known as an Initial Public Offering or IPO. This is usually done when a company wants to raise money to fund its expansion, clear existing debts, meet working capital requirements, or fulfil general corporate purposes.
As an investor, you can subscribe to an IPO through the Application Supported by Blocked Amount (ASBA) facility. If allotted, the shares are credited to your Demat account. Post listing, you can sell these shares in the secondary markets at higher prices to make profits.
Here are a few benefits of investing in IPOs:
Investing in IPOs allows you to acquire ownership in young, promising companies poised for future growth. Such companies tend to perform well in the long run, and subsequently, the value of their shares also increases.
If you are investing to meet your long-term financial goals, IPOs could be your best option. You can acquire IPO shares at a very reasonable rate and gain multi-bagger returns in a few years.
Investing or trading in stocks already listed on the stock exchanges requires adequate market knowledge. However, the case is different with the IPOs. As these are the ones that are yet to be listed, you don’t have to conduct a detailed stock analysis. You can simply look at the fundamentals of the issuing company and decide to invest if they seem satisfactory.
Another reason to invest in IPOs is that they are not as risky as the stocks already listed. It’s because IPO stock prices are initially kept lower by companies to attract a large volume of investors. Post listing, as the company performs well, the prices of their stocks tend to increase. If you invest in good IPOs, there is very little chance you will incur losses.
Investing in IPOs can also help you make quick money through listing gains. You can subscribe to an IPO and then sell the shares on the listing day to make profits. A good IPO can provide more than 50% listing gains.
Like any other investment instrument, IPOs have some disadvantages too. Let’s have a look at them:
The ASBA facility supports all IPO applications. It means your money remains blocked in your account for seven to ten days until you get a refund or allotment.
Equity markets are highly unpredictable. So, you can never be sure of the profits you can generate by investing in IPOs. You may even have to sell your shares in loss if the listing isn’t to your liking.
There’s no guarantee that you will receive the allotment of IPO shares. For oversubscribed IPOs, the allotment is finalised through a lottery.
Whether to invest in an IPO depends on your risk appetite and investment goals. IPOs are excellent opportunities to make quick money or gain long-term profits. However, before investing in an IPO, you must analyze certain factors, such as the issuing company’s fundamentals, offer objectives, valuation, and grey market premium.
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