A stock market is a popular way to build wealth. Similarly, investing in an IPO in the stock market has several advantages in both the short and long term. You can enjoy the steady growth of your investments over time. Also, an IPO provides a great opportunity for to investors offer returns, but the risk is also high. You invest in these company stocks and increase your profits if the company does well. Your capital is appreciated by selling the stock when it reaches a higher market price. Thus there are multiple benefits of investing in IPOs.
Benefits of IPO to Investors
One of the benefits of investing in an IPO is gain on a listing day. Companies get their stock valued and mention the offer price in the prospectus. An investor can apply for a particular number of shares at that specific price. If the share price on a listing day is trading higher than the price paid when applied for IPO, it is called the listing gain.
Recommended to read the article on What is IPO Listing?
Investors can sell the stocks in the open market once the company goes public. This allows investors to realise gains without waiting for shares to be repurchased. Since the investors can buy and sell stocks anytime, it increases their liquidity.
Chance to Small Retailers
The IPO markets are safe and professional, thereby protecting retail investors. The company’s prospectus consists of all information like performance, financials, growth, risks and future plans. Hence, this gives investors enough information to decide to invest in an IPO.
Anyone investing in an IPO and receiving shares allotment becomes a company shareholder. The company owners ensure to keep their investors invested with them. Also, the company plans to achieve its goals and reach profit levels as promised to investors and analysts. The stock price will rise or fall depending on the company’s performance.
SEBI has developed an application that supports block amounts for IPO. This application ensures that the money is debited from your account only after the shares are allotted. The money continues to earn interest in your account till the allotment day. However, this is not the case in the secondary market, where the amount is debited immediately after purchasing shares.
Shareholder Ownership Authority
When you invest money in a company, you procure the voting rights in the company general meetings. For instance, the company you invested in announces in their annual general meeting that it will expand its operations to increase its profitability. As an equity share holder, you have the right to vote against such a decision.
The IPO is often at the lowest price, especially when you invest in a small company that has the potential to grow big. This is because the company offers its shares at a discounted rate. Hence, you can take an opportunity through an IPO because it may be difficult to buy shares when the prices increase.
Read our article on IPO Process in India
Limitations of Investing in IPOs
Like any other investment, even a public offering comes with certain limitations. The following are the limitations of investing in IPOs –
One of the disadvantages of an IPO is that there is no guarantee of receiving shares. If the shares are subscription based, then any number of people can apply for them. Also, the company will allot shares on a proportional basis. If you are a small retail investor, the Pre-IPO mechanism will hardly get you any shares.
When you invest in pre-IPO shares, there is a chance that you might receive less than what you had invested. The pre-IPO share price is decided only after it is listed. However, there is a probability that the listed price may be lesser than the purchase price.
IPO requires you to study the company and its past performance thoroughly. You can read the prospectus document of the company but understanding the same becomes a tedious task and time-consuming.
Applying for an IPO requires you to share a lot of information involving paperwork or filling out the application online. It includes data which you might not want to share. However, you are required to provide the same.
IPO can be a bit tricky, and the process is long and complicated. But if you have invested in a company that has the potential to grow, then your investments will also grow with the company. Also, how an IPO performs entirely depends on the market sentiments on that particular day. Even global factors impact the chances of listing gains. However, before getting into the market, it requires a proper study and background check of the company. Also, investors should not get lured by the benefits of investing in IPOs, they must consider all related factors.