Pros and Cons of Investing in an IPO

A securities market is similar to any other market for goods and services because the concept of demand and supply applies here also. Securities are also bought and sold on the basis of demand and supply. In the primary market, companies sell shares directly to public. The sale could either be an Initial Public Offering (IPO) or a Follow-on Public Offering (FPO). An IPO is the first public offer, after an IPO all other public offers are called FPO. In an FPO, public investors have the advantage of knowing more about the company as compared to an IPO.

To help Indian companies increase their public shareholding, SEBI has allowed an additional way through which the promoters of the listed companies can make an Offer for Sale through Stock Exchanges.

A company needs to prepare itself for an IPO and usually sets up an IPO team in the company for ensuring coordination of all IPO related activities. The team provides timely and accurate information for preparing the prospectus. This team coordinates the entire process and ensures legal compliance.

IPO’s Investment Pros and Cons

1. Pros of Investing in an IPO
   • Opportunity to Act Early
   • Benefits in the Long-Term
   • Price Transparency
   • Small Investments may Provide Great returns
2. Cons of Investing in an IPO
   • Time-Consuming
   • Selling Shares is a Risk
   • Privacy

1. Pros of Investing in an IPO

Investing in an Initial Public Offering comes with a long list of benefits. 2021 can be called as the year of IPOs. As many as 15 companies have launched there IPOs in the first few months of the year. You must be wondering what benefits you enjoy when you invest in an IPO. So, without further ado, let us discuss about the pros of investing in a public offering.

It is however a good practice to keep a close eye on the Qualified Institutional Buyer category of an IPO. If the QIB category is showing complete or over subscription, the IPO can be trusted because the QIBs have far better approach to the details of the company when compared to retail investors.

Opportunity to Act Early

Initial public offering is the time when the shares of a company are rolled out for the first time for public investors. So, you get the perfect opportunity to enter your positions during the early days. IPO may be helpful for withdrawing quick benefits in a brief timeframe period. You can hold your positions for long periods as well.

Benefits in the Long-Term

This is probably the main benefit of investing in an IPO which has been attracting investors from long time. Investing in an IPO can help you extract great returns in the long hauls. IPO investments are a sort of equity investments and can be leveraged fur fulfilling you long term goals like retirement planning.

Price Transparency

The complete information about the price valuation of equity shares in an IPO is available in the prospectus filed by the company and is available publicly. Thus, you get an access to similar data as some of the greatest investors. However, this changes in post-IPO situation. The cost after IPO would depend on the changes in the sectorial performance and investor interest.

Small Investments may Provide Great Returns

The price in the IPO prove out to be the cheapest price that you are offered for investing in the equity shares of a company that has the potential to grow big. However, the stock prices may soar at the time of listing itself and help you in extracting huge profits over a short span. There have been IPOs this year with listing gains of over 70 per cent.

2. Cons of investing in an IPO

Like every other investment, public offerings come with a set of cons as well. Before you invest in an IPO, it is important to know about the cons as well, let us take a look at the cons of investing in an IPO.

Time Consuming

Investing in an IPO requires you to have a through study about the company and its past performance. The same is though available in the prospectus of the company but understanding the same is tedious and time consuming.

Selling Shares is a Risk

In the modern times, many investors plan to sell the shares just after listing to extract listing gains. But the same is not always possible. Generally with highly successful offerings, selling is very easy but in case of others, there may be an uncertainty with respect to the availability of buyers for buying your shares.

Privacy

Applying for an IPO requires lot of investor information in the paperwork and application. It may include some of your data which otherwise you may not want the world to see. However, you are supposed to provide the same.

ConclusionSo, these were some of the major pros and cons of investing in an IPO. You need to mandatorily have a DEMAT account for applying shares in an IPO. If you are new to stock market there are some guidelines which should be followed for trading. Once you are allotted the shares you in an IPO, you can trade them normally.Happy Investing!

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