IPOs are exciting for many reasons. For the company, it gets listed on the stock exchange and it transitions from a private company to a public company. For the existing shareholders, they get to sell their shares and that offers them liquidity. For the investors, they might already have been expecting the company to go public, or perhaps they are just eager to have one more potential star stock in the market.Â
Make sure you choose the best trading app in the store, so that your IPO buying experience is seamless. Moving on, let’s discuss how investing in an IPO can be a great decision for you.
Benefits of Investing in IPOs
Early Entry Advantage
When you invest in an IPO, you get access to the earliest version of the stock at its potentially lowest price. The higher the potential for growth the higher the profitability for you on selling them later. At this stage, the company is yet to be popular and recognised and thus competition might be low for the shares of a company that is going public. Once it gets to the market, its price may go up monumentally.Â
Potential for High Returns
Since the shares are bought quite early and if the company’s growth potential is high the stock price can appreciate a lot and this would result in a high rate of returns for the investors. There have been cases where the company’s stock price had increased multifolds immediately after it entered the market. For instance, Amazon when it went for its IPO in 1997, priced its share at 18 dollars per share. Look at the growth that it has had over the years.
Diversification of Portfolio
Oftentimes IPOs bring in companies from industries and sectors that are not represented enough in the market. This could give you a chance to diversify your portfolio by expanding the number of sectors that you have covered with your assets. Diversification is a crucial part of risk management.Â
The IPO Investment Process
Understanding the IPO Process
The process of IPO involves a few steps of regulatory requirements. The company has to file a statement with the Securities Exchange Board of India, SEBI, and other regulatory authorities listing all relevant financial information and plans for the future. Then underwriters and bankers are to be hired to set the terms and price for the IPO and take up responsibilities. The final pricing of the IPO has to be done, and based on the applications, shares are to be allotted to the applicants. And eventually the shares will be available on the exchange for trading, and based on the market trends, the price of the stock will move accordingly.Â
Steps to Participate in an IPO
- Open a trading account with a brokerage firm that allows you to purchase IPO shares.Â
- Go through the company’s financials, reports, and assess the growth potential of the organisation in the coming months or years.Â
- Submit an application request allotment of shares with the details of how many shares you require and what is your bid price.Â
- Wait for the allotment to be made. You will be notified by your broker.Â
Strategies for Maximising IPO Returns
Thorough Research and Due Diligence
No effort should be spared in terms of research. It is a crucial step in making informed decisions about the stock market. Since the company is rolling out an IPO, it would naturally make relevant data accessible to the public for reference. Study all the information and get a thorough understanding of the company’s performance so far and potential going forward.Â
Timing and Patience
As with any form of investment and trade, patience is key here as well. Some stocks gain in price immediately after the IPO, while others can take their time to grow in value. Wait until the stock blows out and rises in value over time, in case it doesn’t do so right after the IPO.
Risk Management
IPOs are attractive but also risky in their own way to invest in. In an attempt to exploit the benefits of investing in IPOs, do not fill your portfolio with IPOs. At the same time, it is important to not put all your money into a single IPO either. Spread out your investment across IPOs, but also spread out your portfolio across asset classes.Â
Conclusion
Investing in IPOs could put you on the path to profitability if you approach the investment with the right preparation and attitude. Understand the company in and out before you apply for shares and keep in mind the need to diversify. Once you invested in the IPO, do not be intimidated by a lack of immediate price hike, if there is one. Patience is key. As with any investment research, timing, and patience can help you secure high returns.
