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What is Flipping in IPO?

What is Flipping in IPO?

If you are curious about investing your money in IPOs, we are sure that you are always researching various aspects of the IPO. Be it blog posts, books or whatever. And by now, if you have researched enough, you may know most terms related to an IPO. Today, in this short guide, we'll learn about one of the uncommon yet crucial aspects of the IPO. 

We'll learn about what flipping in an IPO means.

What does flipping mean?

Flipping means buying security or an asset to sell after holding it for only a short period. The main aim of the activity is to enjoy quick short-term gains and not wait for the asset to appreciate further in the future. 

While flipping is commonly used in sectors like real estate, it is also used to explain the actions of investors in finance when they sell the shares of an IPO to make a quick gain. 

Here the investor purchases shares of an IPO at the offer price and holds it for a very short period. Then, he sells them before or after they start to get traded in the secondary market. 

Flipping is the act of selling a "hot" IPO stock for a large profit during the first few days of its listing.

Traders usually follow this technique as previous data show that IPO returns on the listing day typically outperform one-year or three-year returns. This is particularly true for IPOs that are offered when the bull market is close to an end. 

However, this might not be the case for every IPO. Listing gains are not ensured. This is because an initial public offering (IPO) may be overpriced, or stock demand may be weaker than anticipated. In addition, stock prices quickly approach their true value. 

Let us understand this with an example. Mr A invests his money in the IPO of XYZ Ltd to sell them after making a certain profit as soon as the prices of the shares rise. As per his expectations, the stocks experienced a rise on the very first day they got listed. And hence, Mr A sells his shares and enjoys IPO gains. In this case, Mr A made profits by selling his shares after holding them for a very short period. Hence, the activity will be termed as flipping and Mr A will be termed as a flipper.

So, it can be said that when an investor sells securities/assets, such as cryptocurrencies, cars, or IPO shares, to make quick profits, it is termed as flipping in finance. If your only motivation for investing in an IPO is to flip it and make a rapid profit, you must exercise extreme caution.

Frequently Asked Questions (FAQs):

 Q. What does IPO flipping mean?

It refers to when flippers or stockholders sell their shares within a few days or weeks after the stock lists on the exchanges. Traders usually carry IPO flipping on the listing day. 

 Q. What is an IPO?

It is an abbreviation for Initial Public Offering. It is a process by which a private company turns into a public company by selling its shares for the first time to the general public. 

 Q. How fast can you flip shares? 

Traders, especially day traders, can indulge in or perform flipping in under a few minutes only. 

 Q. Is flipping risky? 

A few investors may have benefited highly from flipping, but it does not make it free from risks. Flipping is an extremely risky activity, and you must do it after proper analysis.

 Q. Why does flipping happen in an IPO?

Flipping in IPO is common as the return on a listing day might also exceed the long-term return.