Initial Public Offering (IPO) has the potential to double the capital within a week? How? Simply, by the demand and supply rule. Generally, when a company is privately held it raises funds via angel investors or private equity investors.
Privately held companies also raise debt funds from banks and other non-banking financial companies. The raised funds are then used to increase the revenue and expand businesses into other areas.
Once the company has made enough profits and gained the brand and trust of the public, and with the permission of the board members, they can go public. Now, by saying “go public” we mean, they can launch their IPO.
By launching an IPO the company is ready to accept retail investor’s money to increase their profits and expand their business. However, the board has to show a proper plan of action to the investors before asking for their investment.
Also, you should know that when the IPO is launched, private equity investors exit by transferring the shares to retail investors. The same process is followed with every startup wanting to go public. That’s where the angel/anchor investors make profits.
Now that you know how launching an IPO works, let us discuss what IPO buying is like. For the investor who wishes to invest in a company that has no public track record, the company has to file a red herring prospectus to the market watchdog Securities Exchange Board of India (SEBI).
The Draft Red Herring Prospectus (DRHP) includes all the material details required by an investor before investing. Total information regarding the company’s operations and prospects are included in the DRHP such as the number of shares, last three year’s profits, revenues, potential threats to the businesses, and many more.
Let us now understand some pros and cons of buying an IPO:
Get the benefit of early action
Investing in an IPO is similar to swing/positional trading. It has the potential to double the capital invested in a week’s time frame. Just like a trader places a bet on the breakout strategy to earn a good 15-20% of the profit on the capital. If opened at a premium, IPOs can fetch a good 60-70% return in a week. Therefore, by applying for IPO you can get on early action if the company lists on premium.
Focus on long-term returns
Some investors have a vision for the long term. Now, in the past, we have seen some of the IPOs open at a good premium and then do not come back to their respective level. Therefore, in the long run, IPO investment can fetch good returns.
Before listing, the company has to go through various rounds of checks, and then, the issue price is decided as per the industry valuations, and all the calculations as per the rules and regulations of SEBI. Therefore, transparency is maintained in the price allotment.
The investment amount is limited
As a retail investor, you can invest a minimum of Rs 15,000/- and get one lot of the shares. As we all know, investments into the markets are subjected to a variety of risks, however, we have to maintain a risk to reward ratio. Therefore, investing in an IPO has a low risk to reward ratio, thus, is a better investment option.
If we compare IPO investments to mutual fund investment, the research, and the valuation analyses of the stock takes a lot of time. Therefore, it might consume an investor’s lot of time.
The urgency of getting out due to volatility
Understanding color psychology is very important while trading in the stock market. When we are in profitable trade the green color makes us stay invested for long. On the other hand, when the trade is turning into a loss, the red color makes us feel an urgency to move out of the trade. Therefore, due to volatility if IPO lists at a discount, we feel an urgency to square off the position and take a hit on the portfolio.
Blocking of funds
To apply for an IPO you need to apply it on the broker’s or any other registered depository participant’s website. After applying for the IPO, as per the algorithm, you will be allotted the shares. The entire process is completed within a week. Till then, your funds are blocked with your banking partner.
How To Apply For An IPO?
To invest in an IPO you will require an online Demat account along with a trading account. Then, follow these steps to invest in an IPO-
- Login to your trading platform and select the open IPO option.
- Fill the entire application form with mentioning the number of shares.
- Then, you will be asked for your payment confirmation details. Select your preference. You can also choose the UPI option to invest.
With these simple steps, you can invest in an IPO. Also, after the amount is debited from your bank account, it is blocked in an ASBA account with your banking partner. Post allotment, of shares the money, is debited from your bank account, and the allotted shares are credited back into your demat account.