Is Investing in IPO a Good Idea? Is it Really Company Versus Investor?
Have you ever wondered why the numbers of IPO during a certain time is more?
People invest in IPO only for two reasons first one is Listing Gains & secondly for long-term investing.
Investing in IPO
Investors are often tempted to invest in IPO usually after hearing few success stories in IPO. We always listen to someone when it comes to investing. Listening to one’s success story you are fascinated to invest in IPO. For a retail investor, there are few companies that go to public and are successful in long-term. However, the number of such companies are very limited in nature looking at historical perspective.
Myth Of IPO Investing
One carries much myth when it comes to investing in IPO. In the relationship between retail investor and the company, retailer investors more often than not come to a losing end. If the IPO is very successful then he does not get the stock allocated and if the IPO is not successful he would get allocated to lose money.
Let’s talk about various myths the common retail investor carries when it comes to Investing in IPO.
#1 Company is going Public via IPO, should be Financially Strong.
#2 Investing in IPO for Listing gains is High Risk & High Return.
#3 If the IPO is oversubscribed it should be a Good Investment.
#4 IPO is the only Opportunity to Invest in a Particular Company
#5 High Total Number of Investor in IPO hence it cannot be Overvalued.
#6 Listing Price of IPO cannot be Lower than the Upper band of the IPO.
#7 You can get Good Stock allocated if you Apply at Lower Price Band of IPO
#8 High PE IPO is not a Good IPO
The above are the assumptions made by the retail investor. Besides, they have their own reasons to invest in IPO.
Did you know that investing in IPO is concentrated during a specific period of time? Have you ever wondered why there is an IPO Season? On Checking Historically especially the 2008 stock market crash you would notice that a previous year had recorded the highest IPO’s.
Valuation During IPO
Every IPO should be judged on a case by case basis since all IPO do not work in the same way. Most commonly overused and misunderstood concept is PE Ratio. For a country that is obsessed with mileage, [k]itna deti hai ad Maruti Ad, PE is similar to that. Every time a new IPO comes the first question of the retail investor is what is the PE Ratio.
Second most important question is what is the Grey Market Premium. This is another form of ‘over the counter’ where the dealer is involved in the transaction offering some premium even before the IPO is issued. The retail investor gets an opportunity to sell the stock he gets in IPO even before the Listing Date of the IPO.
Coming back to the valuations during IPO. Predominantly the premium during the IPO or valuations during the IPO are very high. This has to be looked into a case to case basis. For example, a company with a PE Ratio of 80 may perform exceptionally well. At the same time, a company with PE ratio of 40 may perform very poor. A good performing IPO is the one which gives return to the investor. It has nothing to do with the company’s performance. PE ratio cannot be the only yardstick of investing in PE Ratio.
You can check the history of Listed IPO to decide how various IPO performed.
High-Risk High Return for Listing Gains
IPO which is over subscriber for many is considered as a measure for investing money in that particular IPO. Nevertheless, investors do not consider stock allocation process.
One should understand the stock allocation process the company is going to adhere to. The stock allocation process most of the time is mentioned in the Red Herring prospectus of the IPO. Red herring prospectus is the first document submitted to the public which has all the details of the IPO.
Now a Bad IPO allocation of stock is higher when compared to a Good IPO.
Chances of a Good IPO or Over Subscribed IPO the allocation is not guaranteed. There are high chances of you not getting shares allocated itself. Or the total number of shares allocated would be so minimal that it would not be worth you time money and energy.
You may come across a Report that would say that if you have invested in all the last 25 IPO’s your return would be X% during the period.
Wheat one fails to understand is the allocation of stock in IPO is not guaranteed for retail Investor.
Valuations are always at the Peak during the IPO which is against the Three Pillar of Value Investing.
Now you don’t have any excuse for not knowing how IPO works. When it comes to Company Versus the Retail Investor. It is the Company that always wins.
Invest in IPO only if you are able to do enough research before investing. If you avoid investing in IPO you are not going to miss anything.
Like this post? Don’t forget to share it!