This is the reason why there is a rush among the investors to subscribe to the stocks of a company with firm fundamentals. Here, we will discuss the benefits as well as the risks associated with investing in IPO so that you can yourself decide whether it is a smart move or not.
Benefits
There are several benefits of investing in the IPO of a good and established firm. They can be listed as follows:
- Getting into the action early: Through IPO investments, you can get into the ground floor of the company with high growth potential. It can also help you in getting rapid profits in a very short time. For long-term investors, it helps in wealth creation as the growth of the company spells good returns for the investors too.
- Meeting Long Term Goals: Equity investments made through IPO have the potential of bringing big returns in long term. These returns can then be utilized by the investor to meet his or her financial goals like retirement funding or getting a house.
- Transparency in Price: Every IPO order document mentions the IPO price per security. You have access to the same company information as any big investor. This gets changed in the post IPO market as then the share price changes as per the market rates and prices offered by the stockbrokers.
- Buying cheap, earning Big: Many times, IPO price is the cheapest price if the company is small but has huge growth potential. This is because IPO is often issued at a discounted rate. Later the prices may skyrocket, thus making it difficult for you to invest in the same company.
Risks
Where there are advantages, there are risks too. To make a smart investment choice, it is best to take both benefits as well as risks into perspective before investing.
- No Buying at Initial Price: Average investors cannot buy at the initial offer price. It is only for big investors or people who get in early in the deal. Even if you are lucky enough to get an allocation, it is often seen as a red flag as it means that the big institutions have already passed on it.
- Underperformance: There have been several IPOs that have underperformed the industry benchmarks set by the market. This has resulted in many investors losing out on their principal amount with negative returns.
- Little Real-world valuations: IPO price is set after valuation is done by the underwriters of the company. However, it is only after the stock gets traded in the market that the real valuation of the company gets known as investors get a chance to analyze the company.
A Word of Caution
No evidence shows that IPOs perform better in terms of performance in the secondary markets. Tighter norms and regulations have made it a safe practice but proper analysis needs to be done before investing in one. Get access to our monthly newsletter to get information regarding any upcoming IPOs and our experts’ advice behind the same.
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