IPO or Initial Public Offering refers to public offering, which includes selling of shares of a company/firm to the institutional investors and the IPOs are typically offered to retail investors as well. Usually, one or more investment banks underwrite an IPO and make arrangements for the shares to be listed on one or more stock exchanges. Companies can use IPOs to raise fresh equity capital, monetize the assets of private shareholders, such as firm founders or private equity investors, and facilitate easy trading of current holdings or future capital raising by going public.
IPOs tend to attract investors just because they offer primary access to potentially high-growth companies, combined with the acute possibility of instant, significant listing gains when trading starts in the share market.
Getting “quick profits in IPO” is a practice called to be “listing gains”. When you purchase shares at the initial offering price and sell the shares quickly on the first day or in short period of time, when the stock prices increase. This helps you realize profits or gains.
Listing gains reality might be misleading!!
Although, listing gains can result to quick & attractive returns, but they come with substantial investment risks for beginners as well. You thus must firstly comprehend the process, examining the potential benefits and the involved risks therein.
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Is IPO Investing Profitable?
Although, investing in IPOs is attributed to gain highly profitable & significant listing gains and it is helpful to attain long-term wealth objectives, but IPO Investment carries risks for beginners.
Some IPOs generate substantial returns, while others may go down the offering price, thereby making thorough research into the company’s management, financials and valuation essential.
It generates profit, with below mentioned aspects:-
High Listing Gains: IPOs often give high returns on the listing day.
Early Access: Investors can get the early access to high-growth companies, allowing them to gain wealth creation.
Wealth Creation: Successful IPOs can give higher appreciation on the capital investment.
Portfolio Diversification: IPOs typically introduce innovative business models with IPOs in emerging sectors, like fintech, green energy, etc. It helps you and other investors to diversify their portfolios.
Risk factors to consider:-
Volatility: IPO shares is highly volatile that might make the shares trading risky.
Limited History: It is hard to evaluate companies shares performance due to lack of long and proven track record.
Overvaluation: Due to high demand, shares might become overpriced, reducing the probability of high returns.
Key moves to attain high returns in IPO Investment:-
Evaluate the Grey Market Premium (GMP): Assess the GMP to help understand the expected listing price of shares.
Check Subscription Numbers: Make analysis of subscription numbers by the third day that help you understand the market interest.
Thorough Research: Read the Red Herring Prospectus (RHP) of the company to evaluate the company’s management quality financial health, and risk factors.
Truth About IPO Returns:-
While listing-day creates exaggerated illusion, as an opportunity for investor to generate guaranteed wealth, however, the reality might be different. As per the recent market data, 50% to 65% new IPO listings trade below their issue price.
Listing-Day vs. Long-Term Returns
Initial Elation: IPOs during the initial days of launch can offer short-term spikes in its price, but this initial spurt usually calms down within the first few weeks.
Long-Term Underperformance: Some studies doing research on historical data, reveal that newly public listed companies is quite far behind matching broad market benchmarks. From year 2015 to 2025, for IPOs the median annualized return was around 5.9%, in comparison of 12.8% and 14.8% for Nifty 50 and Nifty 500, respectively.
Ways to Invest Smartly
If you are looking to invest in Initial Public Offerings, you do not need to rely just on big brand names & temporarily created hype, as it can lead to financial losses. It is extremely important that you go through fundamental due diligence, before investing:
Evaluate financial valuation ratios, such as company’s debt levels, price-to-earnings ratios, etc., before investing.
Read through IPO documents methodically to determine whether the profitability explained is realistic and the reason why company has started offering IPOs.
Also, don’t forget to check, whether the IPO pricing leaves scope for the investor to gain profits.
