In recent times, you’ve likely heard tales of individuals doubling their investments in a matter of days through IPOs. But is this phenomenon too good to be true, or can investing in an Initial Public Offering truly yield such rapid returns? Today, we’re discussing about IPOs to shed light on this financial venture.
IPO stands for Initial Public Offering. Picture a company, let’s call it ABC, with a grand ambition to expand its operations. Imagine they currently operate ten thriving factories, yet aspire to establish a whopping one hundred. The catch? The cost per factory runs into crores of rupees. To realise this vision, they need thousands of crores. This is where an IPO comes into play.
Private limited companies can’t directly source funds from the public, it’s illegal. But through meticulous adherence to specific guidelines, a private entity can go public, transforming from private to public limited status, and consequently, seek investment from the public.
The million-rupee question: why should we invest? The answer lies in shares. In exchange for capital, the company offers us a slice of ownership, expressed as shares. This provides the necessary funds for their expansion.
Another motivator for an IPO might be a company burdened with excessive debt, struggling to stay afloat. In such cases, going public offers a lifeline. By listing on esteemed exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), the company can alleviate its financial strain, revitalising its operations.
Additionally, early-stage investors, like Angel Investors and Venture Capitalist Firms, often invest substantial sums in a company’s infancy. Their foresight pays off when the IPO materialises, as the influx of capital can translate their initial investment into substantial returns, sometimes multiplying it manifold.
When it comes to Initial Public Offerings (IPOs), the allure of potential profits often captures the imagination of investors. But how exactly does the process work, and who are the key players in this financial venture?
To begin, an IPO attracts three distinct types of investors. First in line are the Qualified Institutional Buyers (QIBs). These are institutions and individuals with substantial financial resources, including Mutual Funds and large corporations. They are granted a privileged position to invest in the IPO, often conducting extensive research to gauge potential returns. Impressively, up to 50% of the shares can be reserved for QIBs, reflecting the significant role they play in the process.
Following QIBs are the Non-Institutional Investors (NIIs), typically high-net-worth individuals with considerable financial capacity. They too have a reserved quota, amounting to 15% of the available shares. These savvy investors bring their substantial resources to the table, contributing to the overall success of the IPO.
Finally, Retail Investors, representing individuals investing less than 2 lakhs, make up the last category. With a 35% reservation, they form a critical part of the IPO ecosystem. This group includes those seeking to embark on their investment journey with modest sums.
However, the intrigue intensifies when the demand for shares surpasses the available supply. This phenomenon, known as oversubscription, occurs when more investors express interest than there are shares to allocate. An oversubscription rate of 2x or higher signals a strong IPO, demonstrating significant market interest.
In an oversubscribed scenario, a computerized lottery system may be employed to allocate shares, ensuring a fair and unbiased distribution. This mechanism becomes crucial when the demand far outweighs the available shares.
Yet, participating in an IPO comes with its own set of rules. A single share cannot be purchased; instead, investors must buy in lots. For instance, if the issue price is ₹100 per share, investors may be required to purchase a lot of, say, 140 shares, equating to an investment of ₹14,000.
Speculation, a term often heard in the realm of investments, plays a significant role in Initial Public Offerings (IPOs). Picture this scenario: an IPO for a company is set to launch on the 16th, and you decide to invest ₹14,000. In about 10 days, by the 26th, the IPO will be listed, possibly at ₹200 per share, doubling your investment to ₹28,000. This isn’t uncommon; well-performing companies often see their shares listed at higher prices than the initial offering. Speculators thrive on these quick turnarounds, capitalizing on rapid gains, sometimes tripling or even quintupling their initial investment. However, investors adopt a different approach. They seek out promising companies at lower prices, intending to hold on for the long haul.
Yet, the notion that every IPO leads to instantaneous doubling of investments is a common misconception. The reality is nuanced. A glance at historical IPOs reveals that while some companies experience early losses post-listing, patient investors have reaped substantial gains over time. For instance, Jubilant Food’s IPO started at ₹145, but post-listing, it dipped to ₹114, resulting in a 21% loss. However, today, the same share is valued at over ₹3,100, signifying an over 2000% increase. This illustrates the importance of patience and a long-term perspective in IPO investments.
For those seeking faster returns, there are instances where the money indeed doubles almost immediately. Birla Pacific, for example, started at ₹10 and closed at ₹25 upon listing, delivering a 153% return. Burger King’s IPO began at ₹60 and soared to ₹138.40, providing a swift 130% gain. IRCTC, too, saw a rapid rise from ₹320 to ₹728, effectively doubling investors’ money.
The process of participating in IPOs is relatively straightforward. A Demat account is essential, and platforms like Angel Broking facilitate easy access to upcoming IPOs. For instance, Zomato’s IPO, slated to open on the 14th, is creating a buzz in the market. It’s imperative to conduct thorough research on the company and also gauge the grey market premium, an unofficial market indicating demand. A higher premium often hints at potential gains.
Therefore, IPO investments offer a spectrum of opportunities, catering to both speculators and long-term investors. While speculators seek rapid gains, investors take a patient approach, anticipating substantial returns over time. Understanding the intricacies of IPOs and conducting thorough research can empower individuals to make informed investment decisions. So, whether you’re inclined towards speculation or long-term value investing, the world of IPOs awaits, ready to offer diverse opportunities for financial growth.
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