IPO Listing Gains vs Long-Term Returns: Which Is Better?

If you’re allotted shares in an IPO, you have two options: either sell your shares when the stock price rises above the issue price or hold them for multiple years and earn capital appreciation as the company grows.

Let’s understand and explore both types of returns so you can make informed investment decisions.

What Are IPO Listing Gains?

IPO listing gains are profits an investor earns when the company’s shares are listed on the stock exchange at a higher price than the IPO issue price. Listing gains can usually be observed on the listing day or during the following few months.

How to Calculate Listing Gains in an IPO

IPO listing gains are the difference between the issue price and the listing price and can be measured as an absolute value or as a percentage. You can calculate the listing gain on your IPO investment by using the following formulae.

Gain Per Share = Listing Price - Issue Price Total Gain = Gain Per Share × Number of Shares Allotted Percentage Gain = (Gain Per Share ÷ Issue Price) × 100

What Are Long-Term IPO Returns?

Long-term IPO returns refer to returns earned by staying invested in the allotted shares for multiple years. IPO stocks may experience a rise during the first six months due to high investor participation and initial media coverage. In the following months, the excitement may wear off, and average stock performance may level out.

Long-term IPO returns are driven by company fundamentals, growth potential, and its future strategy.

Difference Between Listing Gains and Long-Term IPO Returns

The following are the main differences between listing gains and long-term IPO returns.

Do IPO Listing Gains Guarantee Long-Term Returns?

Many novice investors assume the listing gains indicate strong upward potential or future stock performance, but that is not necessarily true. IPO listing gains do not guarantee long-term returns; on the contrary, most newly listed stocks experience a slump within 6-12 months. This happens because the initial price jump is often caused by short-term market hype, an underpricing strategy, and high demand from institutional investors.

A study published in the Journal of Marketing & Social Research comparing IPO returns with the BSE Sensex found that IPO stocks are influenced by overall market conditions. However, market performance is not the only factor that matters. A company's fundamentals, valuation, industry trends, and investor sentiment can also have a major impact on how an IPO performs after listing.

Why Listing Gains and Long-Term Returns Differ

Here’s why listing gains and long-term returns differ.

Short-Term Drivers

Listing gains from an IPO are heavily influenced by market sentiment, high subscription demand, and, in some cases, media coverage.

Underpricing

When determining the issue price or price range of the shares, underwriters often set the price below their perceived fair value to create excitement, making investors think they’re leaving money on the table by not buying the shares.

Long-Term Realities

Long-term IPO returns depend significantly on a company's financial fundamentals and consistent earnings growth. Many hyped IPOs eventually underperform broader market benchmarks when they fail to maintain investor confidence.

Why Investors Prefer Listing Gains

Here’s why some investors prefer listing gains when investing in IPOs.

Instant Profits

When stocks are listed at a higher price than the issue price, most Investors sell their shares to book profits instead of waiting for months or years.

Intentional Underpricing

Underwriters often price IPOs below fair value to create market buzz and ensure a full subscription. If the stocks are listed at a higher price, investors can sell their shares and book a quick profit.

Market Hype and Momentum

To attract high subscription demand, underwriters perform roadshows and create hype around the IPO. Good media coverage and retail enthusiasm create intense short-term demand that drives up initial stock prices.

Risks Involved in Listing Gains

The following are the risks associated with investing in IPO seeking listing gains.

No Guarantees

It's not guaranteed that your IPO stocks will list at a higher price on the listing day, and they can even list below the issue price. This can happen if there is a shift in market sentiment or the stock is overpriced.

Speculative Nature

Earning quick profits depends heavily on market hype rather than the company's fundamentals, making it inherently speculative.

Benefits of Holding Long-term IPO Investments

The following are the benefits of holding IPO shares for the long term instead of booking listing gains.

Compounding Growth

Investing for a longer duration gives the company time to scale its operations and expand its business using the funds raised. As the company grows, the share price may increase, reflecting the rising value of the business.

Lower Tax Rates

Long-term capital gains earned by selling the shares after 12 months are taxed at 12.5% without indexation for gains exceeding ₹1.25 lakh in a financial year, while listing gains attract a 20% short-term capital gains tax.

Avoiding Hype

Investing for the long term allows investors to tune out the market noise and focus on companies with strong fundamentals instead of falling prey to overhyped IPOs that may not succeed in the long run.

Wealth Creation

If your IPO investments are backed by proper fundamental research, the shares may offer capital appreciation and help you build wealth in the long run.

When Should You Book IPO Listing Gains?

Here’s when you can consider booking IPO listing gains.

Overvalued Stocks

If a stock opens significantly higher than its fundamental value, it is likely overvalued and may decline in the coming months as market hype dies down. In this scenario, you might consider selling your shares to lock in profits.

High Volatility

If a stock experiences high volatility and low liquidity, especially if it is a small- and medium-sized enterprise (SME) stock, you should consider selling your shares to cut losses

Weak Market Conditions

If the overall market sentiment is bearish or defensive, you can sell your IPO shares to book profits before the prices fall.

Partial Booking

Sell a portion of your allotment to recover your initial capital and hold the remaining shares for long-term growth.

When Should You Hold an IPO for the Long Term?

Here’s when you can consider holding IPO shares for the long term.

Solid Financials

You can consider holding IPO shares for the long term if the company shows consistent revenue growth, low debt, and steady profitability.

Market Leadership

If the business has the potential to become a market leader or has unique offerings and a competitive advantage, it may deliver strong revenue growth in the long term.

Fair Price

You can hold IPO shares for a longer duration if the stock's valuation aligns with those of industry peers rather than reflecting inflated, hype-driven pricing.

How to Evaluate an IPO for Long-Term Investment

Here’s how you can evaluate whether an IPO is worth investing in for the long term.

Read the Prospectus

Before investing in an IPO, investors must read the Red Herring Prospectus (RHP) to understand the company's business, product offerings, financials, and the risks it faces. You must understand how the funds raised will be used, whether for expansion or to repay existing debt.

Assess the participation of institutional investors to gain insights into their level of interest.

Analyse Financial Health

A company's financial performance can give you a better idea of whether it has the potential to grow after listing. Invest in companies with steady profit growth and review their earnings per share (EPS), Return on Equity (ROE), and debt-to-equity ratio to understand profitability and financial strength.

Assess Valuation

Assess the valuation of the company and compare it with that of its peers to ensure its issue price aligns with its valuation. You must check whether the valuation is supported by strong growth and financial performance and not driven by market excitement and hype.

Review Management and Industry

Review the quality and expertise of the management and the growth potential of the industry, as these factors significantly influence long-term returns.

FAQs

What are IPO listing gains in IPO investing?

When a company allots shares to eligible investors who bid for them, it then lists the shares on the Indian stock exchanges, i.e BSE and NSE. IPO listing gains refer to the profit an investor makes when the stock lists on the exchange at a price higher than its IPO issue price. For example, if you were allotted shares at ₹100 and they list at ₹120, you earn a 20% listing gain.

Should I sell my IPO shares on listing day?

Whether you should sell your IPO shares on the listing day depends on your investment strategy and the company’s fundamentals. If you’re seeking quick profits instead of long-term capital appreciation, then you can sell your IPO shares on the listing day and book profits.

Are IPOs good for long-term investment?

Some IPOs can become good long-term investments if the company has strong fundamentals, growth potential, and an appropriate valuation. However, not every IPO may be a good long-term investment.

Does a higher listing price guarantee long-term returns in IPO investing?

No, a higher listing gain does not guarantee good long-term returns, as it can be a result of temporary market buzz and hype that may fizzle out over time, potentially causing the stock price to decline if the company's performance declines or the market does not accept or support its valuation.

How are IPO returns calculated?

IPO returns are calculated as the difference between the selling price and the IPO issue price, relative to the issue price. The basic formula for calculating IPO returns is:

(Selling Price − Issue Price) ÷ Issue Price × 100.

What is the difference between listing gains and long-term IPO returns?

While listing gains measure the profit made when an IPO lists above its issue price, long-term IPO returns measure performance over a longer investment period, such as one, three, or five years.

How long should I stay invested in IPO shares?

There is no fixed holding period for an IPO. The investment duration depends on the company's fundamentals, valuation, and growth potential. Investors are advised to review the business regularly rather than holding or selling shares based only on the investment duration.