An IPO or an Initial Public Offering is when a company puts their shares on sale in the capital market to raise capital from interested investors. Investors invest in an IPO intending to gain high returns after some time through sales, dividends, bonuses, and other profits earned or shared. A company can sell its shares for the first time or a second time if they need additional funding. A company can issue an IPO. There can be various purposes of launching an IPO – company expansion, product diversification, mergers and acquisitions, and debt repayment are the core reasons. While the company’s reasoning for going public is crucial in assessing whether you should invest in an IPO or not, here are some main benefits of investing in an IPO.
Long-term wealth creation
IPOs are equity investments – and every balanced investment portfolio needs equity investments. Equity investments generate higher returns and create more wealth if kept for the long term. Compared to other short and long-term assets, there is a proven track record of equity investments being profitable in the long run, because equity investments also carry varying levels of risks and fluctuations that get minimized/ balanced over a long horizon. By investing in an IPO which is an equity investment, you become a shareholder of the company and earn any dividends or profits the company gains. You also have the freedom to sell your bought shares any time you feel appropriate.
The early-bird advantage
Most IPOs are first or second time offers. IPOs allow an investor to become a shareholder in what could become a massive company with high potential. An early investment into a budding company leaves enough room for the company to grow, amass profits, and make a name for itself in the market. This, in turn, would create sufficient market appreciation, and boost your initial investment. If an established and financially-healthy company issues an IPO, then you have all the more reason to invest in it. When you get in on a company’s build-up during its initial phases, you get share prices at affordable rates. For instance, the recent IPOs of leading companies Metro Brands Private Ltd. and MedPlus Health Services Ltd. issued shares as low as Rs. 5 and Rs. 2. Over time, the profits earned through these shareholdings can be massive.
A level playing field for individual investors
IPOs are a level-playing field for every potential investor. In fact, companies make it easier for retail (individual) investors to get shares of a company. Individual investors get more preference from the Securities and Exchange Board of India (SEBI), and they get the maximum allotment of shares. After that, high-net-worth individuals get allotted proportional shares, and institutional investors get allotted shares at SEBI’s discretion. This helps stir a lot of active participation from lay and expert investors, as most of them are retail investors.
More share price and financial transparency
In every IPO, the company mentions every bit of information considered vital for the investor to know in a lengthy and detailed document called a prospectus or Draft Red Herring Prospectus. While issuing the IPO, the company shares the price per security that is the actual value of the underlying asset. This is the original value of each share. However, after the launch of the IPO, the price per security changes per the fluctuations in supply and demand. The IPO launch can save you from overpaying for a particular share and can help you get it at its original valuation. Moreover, the company shares its fundamentals, partner and management history, shareholding pattern, revenue and profits earned, business model and goals, strengths and risks, and other crucial metrics. This information will give you a clear idea of whether the IPO is worth investing in.
To sum it up:
Investing in an IPO can get you high returns over the long term. However, before you do, it is necessary to read the DRHP in its entirety. Don’t just rely on the share price or offer for sale and expect to accrue profits by buying low and selling high. Do your due diligence and refer to financial and analytical reports in newspapers, journals, online investment platforms, and the likes. Also, check the trends for the industry or sector under which the company that proposed the IPO falls. Without proper research, you risk investing in an IPO due to herd mentality, advertisements, or brief popularity. Remember that as much as an IPO can bring profits, it can just as well bring losses. The bottom line is that IPO investments carry some risk, but those risks get balanced over the long term if the company you invest in has strong financials.