Do you want to invest in a company with high growth potential? Are you looking to grow wealth in the long-run? You may consider investing in an IPO or initial public offer. It is a process where the company issues its shares to the public for the first time. You may find the IPO price the cheapest option to put money in a small company that may grow into a more significant business with time. However, you may not get the IPO allotment on an oversubscription. It is a situation where the number of applications exceeds the shares available for allotment. Should you buy shares on a listing day if you don’t get the IPO allotment?
What is an IPO?
You have the initial public offer or IPO where a private company sells its shares to the general public for the first time. You will find the company’s shares on a stock exchange, such as the NSE or BSE. The company goes ‘public’, moving from a privately-owned business to a publicly-traded company.
Why invest in an IPO?
You may invest in an IPO to enjoy the first-mover advantage. You get an opportunity to buy the shares of a company at a lower price. Moreover, the share price of the company could rise sharply after listing on the stock exchange.
You are purchasing the shares of a company when you invest in an IPO. You may find the company having solid fundamentals or even an economic moat. It means the company enjoys a distinct advantage over its competitors that may translate into a higher market share. You may earn a reasonable return if you stay with the investment for the long run.
You may invest in an IPO if you seek a level playing field with more prominent investors. You will find the price of the security mentioned in the offer document. It helps you make an informed decision as you enjoy access to the same price information as more prominent investors.
What is IPO oversubscription?
You will find the IPO oversubscribed when the number of shares that investors seek to purchase is more than the number of shares available for allotment. In simple terms, the company cannot supply enough shares to meet investor demand.
Suppose you find the IPO of Company A oversubscribed eight times. It means there were eight times as much demand for shares of Company A as the planned issue. You may not get the IPO allotment because of the excess demand for the shares of Company A.
Why does the IPO get oversubscribed? You may find underwriters following a well-used strategy of setting share prices at a discounted value in the IPO. It could create a buzz among investors looking to buy the company’s shares, and the IPO is oversubscribed.
Should you buy shares on a listing day if you miss IPO allotment?
The Sensex crossed the 50,000-mark for the first time in January 2021. You will find many companies lining up initial public offers during a bull market to take advantage of the positive market sentiment. It helps them get a reasonable valuation for their shares. Moreover, many investors invest in an IPO for listing gains.
You will find a company listing on the stock exchange trading at a price that may be higher or lower than the allotment price. You enjoy listing gains if the company lists at a higher price than the allotment price.
You have investors chasing IPOs during a bull market. It could result in huge oversubscription as investors look to profit from listing gains. You may feel tempted to buy shares on a listing day if you don’t get an allotment in the IPO.
You have HNIs (high net-worth individuals) investing vast amounts in the IPO with money borrowed from the market. It leads to an IPO oversubscription, and the shares of the company may enjoy a strong listing on the stock exchange. Moreover, you have many HNIs exiting the investment on listing day to enjoy listing gains.
If you buy shares of a company on listing day, you may invest when valuations are high. You could end up overpaying for the stocks as there may be a 40%-50% premium during the listing. You must avoid chasing the stocks of a company after a strong listing. You may wait for a few days after the listing to gauge the actual value of the company.
You would find many retail investors struggling to get the IPO allotment during oversubscription. It would help if you avoided IPOs and focused on investing in fundamentally strong companies with a solid track record of performance.
You may consider investing in stocks of fundamentally strong companies for the long-term rather than chase IPOs. Moreover, you must stay with your investment for the long-run if you get the IPO allotment in shares of companies with solid fundamentals and an economic moat. In a nutshell, you must avoid chasing listing gains from IPOs and invest in fundamentally strong stocks for the long term.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
