Should you invest in an IPO?
Created on 14 Feb 2019
Wraps up in 4 Min
Read by 2.3k people
Updated on 19 Oct 2019
IPOs create a lot of excitement amongst investors. Business newspapers & T.V channels make it a point to tell you how "advisable" it is to subscribe to this new offering. So let's find out the hard facts behind these IPOs
"It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."
- Warren Buffett
There is a lot of wisdom in that statement. Let's analyze the characteristics of an IPO to better understand the insight that Buffett is offering us
Characteristics of an IPO
The answer is obvious, everyone wants to sell when there is a boom and you are likely to get a good price. Similarly, an IPO is an event when the promoters of a company are diluting their stake. They would naturally want to do it at the maximum possible price.
Let's look at the chart below to substantiate this point
Number of issues
Amount Raised (In Crores)
Credits - Chittorgarh.com
Notice the number of IPOs in 2013 & 14 when the market was not doing well. No company was willing to dilute its stake in such a market. But as soon as the markets started rising, everyone wanted to take advantage of the opportunity and gather money from the public. Ask yourself - Do you really want to be a part of this?
IPOs are sold by knowledgeable sellers (Merchant bankers & company insiders) to the common investor - Merchant bankers are paid to price the IPO as high as they can while ensuring that it is subscribed. It is a part of their job to ensure that a company receives maximum valuation in an IPO.
Hence, they are certainly not concerned about whether the public is getting a fair deal or not. So, the entire concept of IPOs is designed to favor the seller at the expense of the buyer. Ask yourself - Do you wish to be that Buyer?
Restrict yourself to the companies that are already listed - Isn't it weird that out of the thousands of listed companies that are traded everyday people find the one that is coming out with an IPO to be the most attractive one
Attracted by listing Gains?
Media usually hypes the listing gains that you can get. Yes, Some IPOs do rise 20-25% on the day they are listed. So, it is assumed that you can earn
Now even if the share rises 20% on the listing day, your profit on the investment of Rs 15,000 is going to be Rs 3,000. Huh!
But it gets worse! More than 50% of the IPOs actually list at a discount to their offer price! We don't get to read about them because the financial industry chooses to keep silent about them.
So here is how you can get listing gains
Apply for an IPO
But ironically, if it is oversubscribed many times, you will not get more than 1 or 2 lots
Hope that the listing is at a good premium (50% chance)
If all the above mentioned happens - YIPPEE!
And we thought IPOs were good for us!!
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