Why IPOs look attractive and stock markets appear boring?
IPOs are the talk of the town again, it is evident from the oversubscription of most of the IPOs as recent as Mrs. Bectors Food IPO which got oversubscribed almost 200 times. Now the focus shifts to Mrs. Bectors Food IPO allotment and then the listing
Happy Driving... For Now
Many investors are interested to invest in IPOs after looking at the listing of companies right from Happiest Minds Technologies to Burger King. Companies come up with their IPOs to raise capital for their long-term plans based on their business prospects. The raised capital can be deployed for aggressive acquisition efforts or massive expansion plans, depending on the opportunities the company visualizes at their end.
Since, most of the IPOs come during surging market and promoters’ aim to limit dilution, the valuations are generally at a premium. Also, the mindset and willingness of investors to invest during rising market is high as they constantly witness increase in their equity portfolio value day by day.
But Mind the Speed breakers
One of the biggest risks of investing in IPO is Valuation Risk. The possibility of you investing at higher valuations during IPO is quite high.Hence, it is important to decide how much you are willing to pay for that additional growth for the listing company. Another risk is related to lack of track record or having limited information about the past performance of these IPO companies.Looking at IPOs as short-term investing based on listing premium, which is a topic that is often discussed, is also wrong as these companies will invest the raised capital over a period and take time to generate returns for its investors. Equity investment is for long term benefit from growth of these companies and are not short term in nature.
There Are Many Well Travelled Roads Too
On the other side you have the entire stock market where you have bigger opportunities to invest and grow wealth over long a period. There is no denial that lot of listed companies too will be expensive from valuation perspective at current market levels, but they can be evaluated based on company’s past performance, growth potential and sector’s prospects.
Investing in Stock market and IPO is like investing in the known (already listed stocks) than the unknown (IPO).
The idea behind the article is not to discourage IPO investment, but to share that IPO is a part of stock market.The opportunity to invest and create wealth exist in overall market if you invest in the right companies it may not be limited to an IPO. So if you have kept applying for IPOs and have hardly got any allotment don’t worry. Keep your eyes open and mind invested in the bigger market i.e. stock market and you will get your opportunity.