Is it really worth investing in IPO Stocks? - Everyone gets enthusiastic about new matters. The new clothes, new motorcycle, new car, etc., always entice the general public. Investors who invest in the stock market are also like everyday people and therefore they're also tempted by the word ‘new’ especially when it comes with the opportunity to help them generate higher returns. In this publish, we are going to discuss whether it’s worth investing in companies that are introducing IPO for ‘general public’ or not.
But before we get to that, let’s look at:
What is IPO?
Whilst a privately held organization offers its shares for the first time to the general public, then it is called initial public offering (IPO). It’s a way for a private company to enter in the stock market by going public.Before the IPO, a privately owned company have shareholders like founders, co-founders, angel investors, venture capitalists, and even relatives. But, after the IPO issuance, the company can have shareholders like public, institutional investors, and mutual funds etc., who can buy the shares of the company and sell at a reasonable price.
Why do Companies go for an IPO?
There can be several reasons why any organization or company offer an IPO to the general public. Right here are a few of the common ones:
- To raise capital
- To fund capital expenditures
- For acquisition
- For expansion and growth plan for the company
- To create public awareness
Also, IPO helps in generate plenty of publicity for the company and consequently allows in developing marketplace publicity, oblique publicity, and brand fairness.
Why do most IPOs come in Bull Market?
It is kind of obvious since the promoters of a company sell their stakes most effective while they’re assured of getting a good price. And it generally happens when there is a bull market. As the investors are generally positive in the times of bull market and willing to pay good prices for the IPO shares of the company, giving owners with the opportunity to raise enough fund to meet the end goals. On the contrary, in the bear market, the investors are usually cautious and avoid taking unnecessary risks, making it difficult for owners of the company to raise many funds.
What mistakes did Investors make while going for IPO Investing?
Below we’ve enlisted a few common mistakes that investors often repeat whileinvesting in IPOs:
- Under-Pricing Myth – It is a myth around IPO that offered price is relatively lower than its true value which investors pre-assumed and invest in the IPO. In doing so, they believe that they are amongst the first ones to have the opportunity to unearth the quality stocks and will be rewarded handsomely when the market realized its true value. However, it shouldn’t be taken granted.
- Herd-Mentality – Herd mentality is very common in investment community which often influenced even the savvy of investors to buy some stock or IPO in the underlying belief that everybody else is investing in it particularly – which is not good!
- Get Emotional – Most people indulging in the stock market are often driven by market sentiments. When an IPO launches in the market, the media and news create a hype that overwhelmed many investors into making wrong decisions – Within this, the investors lose focus that is required to analyze an IPO for its future potential for long-term capital appreciation.
- The ‘New’ Strategy – Investors tend to compare the upcoming IPOs with previous IPOs although there is no relation between them and conclude that it will perform exactly in a manner as the previous one. This thinking put many investors in danger of losing big throughout the process.
Is it Worth Investing in IPOs?
Well, definitely yes! As long as your reasons don’t be influenced by any factor we mentioned above. Many investors have succeeded in building huge wealth from investing in IPO stocks. If you’d invested in Infosys IPO or IRCTC IPO then you already know and must be sitting on a pile of wealth. However, not IPOs behave in the same manner.The list of underperforming IPOs in long-term is quite longer than the list of IPOs that performed well in the market. So, betting on every IPO is definitely out of question. Also, IPOs are by no means priced in the blessings of the public. Within the case wherein few IPOs are fairly priced, it receives a variety of demand from the public all through its services and gets over-subscribed. Furthermore, it quickly will become over-priced once it starts buying and selling in the market. Some IPOs might come up with an amazing return in the 1-2 months of its listing as they may be introduced inside the bull market, however, in the end, their performance is quite negative. If you are willing to invest for the long-time period, then be careful about investing in IPOs.