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Why should you invest in IPO?

 

Why should you invest in IPO?



Why should you invest in IPO?


IPOs are again the hottest area in the Indian financial market as a lot of money has been made in the past few months. In 2017, around 38 Mainstream IPOs were issued, raising an amount of Rs 75,278.57 crore, whereas in 2016 

So far 26 issues have already been issued successfully, raising an amount of Rs 26,500.82 crore. So you can clearly see that the IPO market is slowly gaining momentum.

I was chatting with my friend who told me that according to him IPO is a better way to make quick money. 

His opinion was based on recent experience, which he gained by investing in two IPOs including Avenue Supermarts and CDSL, which gave good returns on the first day of listing.

I don't know if this is really a good way to make quick money or not, so let's dig deeper to analyze the IPO market to see if it is really a value or a trap. 

This reminded me of a good quote from the legendary investor Warren Buffett, who said, "Be fearful when others are greedy and fear when others are afraid".

An initial Public Offering (IPO) is a public offering where a company sells shares to the public for the first time. 

Companies mostly do this to raise capital for expansion, exit investments made by angel investors, etc.

Moreover, history also tells us that it is better to be a seller than to be a buyer in this market because in the long run more than 100% of the total assets created in the IPO market are earned by the sellers and the buyers lose money.

Warren Buffett said, "It is almost a mathematical impossibility to imagine that, out of thousands of things for sale in a given day, the most attractive price is the one that is offered by a knowledgeable seller (company insiders) to a less-knowledgeable buyer." being sold. (Investor)".

Some characteristics that show that IPOs are more profitable to be a seller than to be a buyer. First, sellers are insiders who know more about the company than buyers, second sellers decide the timing of the sale and therefore when they receive a higher price for their shares, and finally, the number of shares offered. 

If so, they choose to sell. It is not fixed, so it can be played by merchant bankers to get the optimum price from the seller's point of view.

Benjamin Graham, the father of value investing, said, "Somewhere in the middle of a bull market, new issues first emerge. 

These are not unattractively priced and some big profits are made by the initial issue buyers. continues to grow in the U.S., this brand of financing continues to grow; companies' quality continues to deteriorate; Prices ask on the verge of exorbitant prices. 

Issues are offered at slightly higher prices than current levels for many medium-sized companies that have a long market history.

However, it cannot be ignored that in the past few life-changing IPOs have also entered the market which including DMART, RVNL, IRCTC, etc, and people have made a lot of money but offering shares of the company is very rare. low prices.

History says that most companies come out in IPOs during bull markets when people have enough money and are able to pay higher prices for shares. 

Small investors usually get caught up in the words of their brokers, get caught up in the hype and often bet the bulk of their savings on listing profits. 

The reason I believe that small investors should avoid IPOs is that it is generally expensive and has always performed poorly in the long run. 

I suggest retail investors choose a quality company for the long term. Investors should keep an eye on the company's financial data for the last 5 years where they understand the company's future growth potential.


Also read: Chase Sapphire Reserve credit card

Also read: Delta SkyMiles GOLD Card Review



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