IPO Investing: Is It Worth the Risk?

Do you want to get rich fast? You may have to take higher risks if you seek attractive returns from your investments. The Initial Public Offer or IPO can help you to earn a profit in a short time. The IPO is a process where a private company offers its shares to the general public for the first time. Investing in the IPO of a company that has the potential to grow into a more prominent company can make you rich. However, do the rewards outweigh the risk of the investment? 

There are several IPOs lined up for the year. If you invest in stocks, you might want to put money in an IPO. You may invest in the IPO to enter a company that offers the high-growth potential. You may also be seeking the listing gains from the IPO. However, hype surrounds IPOs, and you must be careful before investing your money. 

Why invest in an IPO?

You get the chance of investing in a young company that may grow into a big firm with time. You may invest for listing gains as some IPOs have offered investors the return on investment of over 100% on a listing day. 

IPOs can help you to achieve financial goals if you stay with the investment for the long-run. The IPO is a transparent process where you have access to the same information as more prominent investors. It gives you a fair chance to earn a profit from the investment.

Also Read: New Investors SIP Their Way in to Mutual Funds

Risks of investing in an IPO

• Investing in an IPO only for the listing gains may lead to severe losses if the company fails to live up to the expectations.
• You may invest in new business through an IPO for a listing gain. However, you must do adequate research on the company and understand the business risk before investing your money.
• Broking houses may offer you the loan facility to invest in an IPO if you don’t have the money. You must pay a fraction of the amount, and the broker will fund the rest of your investment. If the IPO doesn’t do well on the listing, you could suffer a massive loss as the broker would charge a high interest on the loan.

Should you invest in an IPO?

Invest in an IPO only if you can understand the business of the company. You must read the red herring prospectus of the company which offers the details on the business operations and the financials of the company.

The IPO may be overhyped, and you must keep a check on your emotions before investing. You could even wait until after the IPO and then invest your money in the shares of the company. 

You must invest in the IPO only if it matches your investment goals and risk tolerance. If you believe that the fundamentals of the company are healthy, then invest in the long term. You must take a close look at any litigation or liabilities that may impair the future growth of the company. Finally, you must be able to differentiate between the hype and the real strength of the company behind the IPO. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in