5 Important Factors to Invest in Initial Public Offerings (IPOs)
Last Updated on May 10, 2023 by hassan abbas
One would likely hear about the upcoming IPO of one or the other company almost every day. We are witnessing a tide of IPOs in the Indian share market in recent times. As various indices are touching their all-time highs, companies flood the stock market with IPOs. A sizable number of investors and traders, too, seem to have high excitement levels regarding these IPOs. Most of them see the IPO as a golden opportunity to invest in companies that could bring huge returns. This eagerness is the benefit that investors get by investing in IPOs. But let us begin by answering why companies come up with IPOs in the first case.
In an initial public offering or IPO, a company issues the shares for the first time and lists itself on the stock exchanges. The companies prefer to bring the IPOs to fulfil their various capital requirements. Private firms wish to generate funds to finance their future business plans. As they try to expand their business into new territories and develop new and innovative products, their capital needs increase. So, they sell a certain portion of the shares to the investors in the hope of turning the company into a successful venture. Quite a good number of examples exist where companies became key players in the segment after IPOs. So, investors can benefit from the growth of the company. A good example can be the upcoming LIC IPO.
Many investors are eager to participate in big IPOs like the LIC IPO. Yet, some people do worry when it comes to IPO investments. Here are the top five reasons to invest in IPOs.
One Gets Early Access
Many companies with a very sound business model go for an IPO. By investing in its IPO, the investors can become a part of its success story early. As the company has very high growth potential, it can create a sustainable and profitable revenue-generating model. If one is very good at assessing a company based on its business structure, he can identify its potential. If your assessments turn out to be true, you will have a great investment avenue opened up for you. As you invest in the company’s initial days, you are most likely to get its shares at lower levels too.
Good Returns in the Long Run
Investing in IPOs is similar to investing in the equity market. You buy the shares of a specific company hoping that the price of these shares will rise to give you profits. With time as the company brings the IPO and performs well in the market, its share price will certainly rise. Hence, investors buying the shares at a relatively low price during the IPO are set to get good profits to fulfil their targets in life. They can use the profits to fund various needs at different stages of lifelike, children’s higher education, foreign vacations etc.
Transparency in Pricing
The companies have to take due permission from the market regulator, India’s securities and exchange board (SEBI). The SEBI lays down guidelines that the companies need to follow. They have to meet the strict requirements set by SEBI. The SEBI conducts a proper review of the IPO application put forward by a company. Any failure to comply with the rules and regulations can lead to the cancellation of the IPO. So, the companies remain quite transparent about the IPO pricing. In the IPO order document, there is a clear mention of the price of each share. As investors, you thus get all the important details from the IPO price to a company’s financial condition beforehand. One can even track the share prices after an IPO listing.
Profit by Selling Shares
The daily market watchers must be aware that the prices of shares often register a huge jump. Post the IPO, just as the shares start trading, the share prices reach very high due to excessive demand. Most investors who think that there is immense growth potential in the company want to grab its shares as quickly as possible. Those who took part in the IPO and have the shares can sell them now and earn big profits.
The shareholders who purchase the shares during an IPO of a company are likely to get more advantages than the rest. The companies issue bonus shares and additional dividends if it performs well. Hence, you get extra chunks of funds for investing in the early stages of the company.
In conclusion, it is reasonable enough to say that investing in IPOs can be very advantageous. If the investors make well-informed decisions and invest in an IPO with due research, they can reap good rewards. It would thus be a smart choice to keep a close eye on the upcoming IPO.
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