IPO's

When a company decides to go public, it offers shares at a pre-determined price/price-band through the IPO - Initial Public Offering. 

 A large number of reasons exist for a company to decide to go public, such as obtaining financing outside of the banking system or reducing debt. 

The main reason companies decide to go public, however, is to raise money – a lot of money and spread the risk of ownership among a large group of shareholders. Spreading the risk of ownership is especially important when a company grows, with the original shareholders wanting to cash in some of their profits while still retaining a percentage of the company.

So What is an IPO? 

An IPO is acronym for Initial Public Offering is the first time a company issues shares to the public. This is when a private company decides to go ‘public’.

Before the IPO, a company has very few shareholders This includes the founders, relatives and venture capitalists. 

But during an IPO, the company opens its shares for sale to the public. As an investor, you can buy shares directly from the company and become a shareholder.

When I can sell an IPO stock?

After applying for an IPO a date of listing is declared. The company is listed on the specified stock exchange from that day on wards, and the journey of the stock begins in stock markets. One of the biggest attractions of buying IPO stock is the enormous potential for profit making — often on day one. 

Also shares are being introduced in the market for the first time, their price is still unaffected by the market demand. Hence, if researched right, investors have an opportunity to earn short-term, as well as, get long-term gains.

For example Happiest Minds Technologies Ltd was listed on Sep 17, 2020 and the listing day gain was a whopping  123.49%

Burger King India Limited was listed on Dec 14, 2020 and the listing day gain was a spectacular 130.67%

But its not the case every time because Angel Broking Ltd was listed on Oct 5, 2020 but the listing day it went down by - 9.85 %. 

So the question arises 

What are the risks associated when you plan to buy an IPO?

Small investors need to be aware that some times there is significant risk associated with IPO's. They need to weigh the pros and cons before buying an IPO. 

If you’re considering buying an IPO, you’ll need to research and evaluate the company’s business model. You’ll look to assess its future plans and want to see whether the company is consistently profitable or at least has a path to consistent profitability.

Companies coming out with IPO's have limited histories and so it can be tough to assess and value them.

So if you can wade through the document, you can glean enough information about the new company to make a call about the valuation — is it worth buying at the stated price.