There is always a big hype created around IPOs where a myth floats around the market that trading in an IPO can double/triple your money in a few days. Is it really true? Not every IPO will guarantee a 2x or 3x return on your investment, as it depends on a lot of factors. So, in this article, you will learn about the truth about IPOs. Should you invest in them, and if so, how can you do it as a beginner investor?
What is an IPO?
An IPO (Initial Public Offering) is a sign that a company wants to expand its operations and serve more people. It needs to raise a huge amount of capital for this, so it goes public. A Pvt Ltd company goes public by listing itself on the BSE (Bombay Stock Exchange) or the NSE (National Stock Exchange). After this, you can see the company on the stock market live, ready to be invested in.
Who invests in an IPO?
Qualified Institutional Buyers are the first group of people who invest in an IPO. These are mutual funds, insurance companies, or individuals who invest after doing their research. Even big corporations are a part of this group. They are allotted 50% of the stocks available by the company. Next comes the high-net-worth individuals, who are allotted 15% of the stocks. Finally, the remaining 35% is for retail investors. They generally use a stock trading app for the same.
Sometimes, more people want to invest in a company’s IPO, and during such times, we say that the IPO is oversubscribed. This means many people want to invest in that company’s IPO, showing that it has high demand. But beware that as a retail investor, you will have to buy a lot of shares. You can’t buy single stocks on any trading app.
Why invest in bulk and not individual shares?
If you look at the stock charts, any stock in an IPO has an issue price, and it’s generally listed at a higher price. If you invest in an IPO at the issue price in bulk, there is a high chance that your money will be doubled or even tripled in just a few days when the IPO is listed at a high price. So this way, you can book a significant profit in very little time.
How to invest in an IPO?
When you learn to trade first things first, you’ll need a Demat account to participate in IPOs. Keep an eye on upcoming IPOs using investment apps or financial websites. Research the company thoroughly – its financial health, growth prospects, and industry trends. If it checks all the boxes, you’re ready to dive in.
Here’s the catch: only some get a piece of the IPO pie in the Stock market in India. Oversubscription is common, with demand often exceeding supply. In such cases, shares are allocated through a lottery system. But remember, even if you secure shares, it’s essential to consider whether to hold or sell them immediately.
To hold or to sell?
This is the million-dollar question. While some investors prefer to cash out immediately and book their profits in this stock market trade, others opt for the long game, holding onto their shares for potentially greater returns down the line. The key is to strike a balance between speculation and long-term investment strategy.
Investing in IPOs can be a thrilling journey, but it’s not without its risks. By understanding the ins and outs of IPO investing and conducting thorough research, you can position yourself for success in the dynamic world of the stock market. So, gear up, get some investment tips, do your homework, and get ready to seize the opportunities that IPOs offer.