There are many reasons why quite a few investors avoid subscribing to an initial public offering (IPO) and prefer investing in stocks that are already listed. Why is it that while investing in an IPO, investors are a bit skeptical?
Several investors have benefitted from an IPO, while others have not. Although every investor has their own preference and reasons for investing in an IPO, it is important to have an overview of investing in IPOs.
Should you invest in an IPO?
IPOs are offered by a public limited company, which gives an investor the opportunity to invest in their company. Before one decides to invest in an IPO, one needs to analyze certain factors about an IPO.
Not easily accessible
For an individual investor, IPO is not easily accessible or within their reach, unlike financial institutions. The reason being, most of the IPO stock is reserved for banks, fund houses, and other retail institutions, leaving just a small portion for individual investors.
Unpredictable
Investing in an IPO is unpredictable. Either you hit or not. The investors who are not allotted shares during an IPO have to be content by buying from secondary markets, which do not work for some investors, as they have to pay the market price, which is generally higher than the IPO.
New company risk
An investor who is looking for an opportunity to enter the markets may think twice about investing in an IPO, which is a new company for them, and at this stage, the risk is too high. An investor has to check the company’s earning potential and its earning capacity, depending on the business of the company.
Considering these factors, an investor, who is relatively new, or just a beginner, would want to wait and watch before getting into an IPO investment.
Benefits of investing in an IPO
Not all IPOs are a risky proposition. Some IPOs are worth waiting for. There are investors who eagerly wait for an IPO of any reputed company. If the IPO is worth investing, it means that the investor can get a share in the company stock first hand, when it is about to be listed. This is because once the IPO makes it to the secondary market, the prices can rise if markets are positive about the company. In case the company is a reputed business house, then the stock has the potential to rise even ten times.
When new IPOs are hyped beyond a limit, they can surely backfire. When IPOs list at good prices, there is nothing great with their returns as compared to hype it made before listing. A recent example can be quoted of the Snapchat IPO. It was launched at a price of 24.48 and jumped to 29.44. However, analysts still rate this IPO as a damp squib due to its slow growth.
Investing in an IPO is a lesson for all those investors who dream of striking gold with its debut. However, markets can take another route too. The best policy for any investor is to wait and watch and let the stock settle down after it is listed. It is important to research about the background of the company coming out with an IPO to make an informed decision.
