If you are following the stock market for the past couple of months you definitely would have heard the term IPO and about its listing gains, how people are increasing their money twofold in IPO in a couple of days. So is the hype real and how it’s all working.
First, let us see what an IPO is.
What is an IPO?
IPO refers to Initial Public Offering. It is the process of offering shares of a private corporation to the public in new stock issuances.
This process helps a company to raise funds from the public, and private corporations change to a public traded corporation.
How an Initial Public Offering (IPO) Works?
Prior to an IPO, a company is viewed as private. As a private company, the business has developed with a relatively small number of shareholders including early investors like the organizers, family, and friends along with professional investors, for example, venture capitalists or angel investors.
At the point when a company reaches a stage in its development cycle where it trusts, it is mature enough for the rigours of SEBI regulations along with the advantages and obligations to public shareholders, it will start to advertise its advantage in opening up to the world.
Typically, this stage of development will happen when a company has reached a private valuation of approximately $1 billion, also known as unicorn status. Nonetheless, private companies at various valuations with solid fundamentals and demonstrated profitability potential can also qualify for an IPO, contingent upon the market rivalry and their ability to meet posting necessities.
An IPO is a major advance for a company as it gives the company access to raising a great deal of cash. This gives the company a greater ability to develop and expand. The increased transparency and share posting validity can also be a factor in assisting it with obtaining terms when looking for borrowed assets as well.
Overall, the quantity of shares the company sells and the cost for what shares sell are the generating factors for the company’s new shareholders’ value. Shareholders’ value actually addresses shares claimed by investors when it is both private and public, however with an IPO the shareholders’ value increases significantly with cash from the primary issuance.
Can you make money using an IPO?
The answer is yes and no, if we talk stats out of 14 big IPOs in 2020 10 of them saw moderate to an extreme level of listing gains.
One of the IPO called Happiest Minds Technologies Ltd. was up 111% on listing day, but this doesn’t mean all of them were successful Angel broking had a listing price that was down 10% of the asked premium.
Now you have to realize that IPOs are offered when people are willing to pay the premium, that is when we have a bull run in the market. So chances are you would pay a lot more for that company from its actual value (do your research properly).
Let’s come to the main question: can you make money using an IPO. I have made most of my profit in my portfolio from IPOs like Rossari Biotech Ltd., CAMS. So, it is possible to make money from IPOs, but only with proper research.
What to research before investing in IPOs?
IPO applications are open for 3 days, don’t invest on the first-day wait for the second or third day to see the subscription of the IPO, I invest in those IPO which are subscribed more than 3 times and on the second day. On the first day, you will get an idea of the subscription for the IPO and you can use this to your advantage and plan your investment accordingly.
The most important step is to thoroughly go through the D(RHP) Red Herring Prospectus(RHP) and D is to tell you about all the important dates. You can read this document on the SEBI website or any of the broker’s websites.
Always try to stick with your plan, first make a plan for your IPO investment as if you want listing gains then sell on listing day or if you believe in the company’s fundamentals than you can invest for the long term, but most important is to stick with your plan.
GMP (Grey market premium), is the amount at which grey market shares of the IPO are traded before the IPO gets listed on the market. Grey market is illegal, So don’t use this as an indicator for applying in an IPO. You can use GMP to see how excited the market is about the upcoming IPO.
How to apply for an IPO?
To apply for an IPO you will need a DEMAT account and then you can apply from any of the major banks be it SBI, ICICI, or HDFC etc…
I use discount brokers like Zerodha and Upstox for convenience, you can simply go on their website and apply. The payment can be done through Net Banking and UPI use whatever suits you the best.
Just make sure to keep the amount in your bank account as it will be on hold and if you get allotted then that amount will be deducted.
Tip: If IPO is oversubscribed like 10 times then apply from as many accounts as possible, this is done to improve the chances of getting the IPO.
IPO is a type of investment don’t see it as a get rich quick scheme and always remember IPO are most offered when you the investor is willing to pay for it at any price, So in good times don’t become a bad investor and see it as an investment plan.
IPO can be the chance of getting a good company at a good price, for example, IRCTC you will not get it at post listing price. Do your research properly and keep learning.