Biggest mistakes people make while investing in IPO

An IPO is an initial public offering or launching of stock. It is a public offering where the company goes public and lists the share on the stock exchange for the first time. IPO is the process where it allows a company to raise capital for growth and expansion from the public investors. It means the company’s ownership is transitioning from private to public ownership. It is often termed as “Going Public” which indicates that now even public investors can take part in investing in that company.

Why invest in an IPO?

Companies come up with an IPO to raise capital for future growth prospects and expansions. But some other reasons for IPO can be an increase in awareness and status of the company. It is started with a view to having a solid long-term plan, to satisfy the requirements of the exchange and listing authority. The company wants to convince potential investors that investing in their company is a viable investment opportunity to consider.

An IPO is a process that provides shares of any company available for the public to buy and sell. Many investors participate in the IPOs as the initial value of a share is a good value.

Reasons to Invest in IPO:

IPO investment provides you with an opportunity to invest in a company at an early stage

It allows an investor to invest in a well-established company. Because many mature companies remain private for years to decide the float.

You get to learn a lot from an IPO investment about the sector and the company. When the shares are listed for the public, there are high levels of disclosure required that provide transparency and assurance.

Reasons to hold back:

The hype of an IPO makes the company overvalued in the beginning and later it fails to perform according to the expectations.

The short-term investors and traders buy the IPO and sell it off quickly. They try to make an initial gain. But this can cause high volatility in the market in early trading.

Lack of understanding can be very detrimental when it comes to an IPO investment. If you are willing to invest in an IPO without doing your own research, then you should re-think your decision. You should have the appropriate knowledge before investing which will help you to understand how much to commit and utilize.

Biggest mistakes people make while investing in IPO

Lack of Information: When a company goes public there is not much information available about the company except that which is available in the public domain. Additionally, analysts who attend meeting with the management to expose stuff doesn’t really have any third-party opinion regarding IPOs. Many brokers look at their profit and they refrain from giving any negative opinions out in public regarding IPOs. If it is a large and reputed company the brokers fear losing allied business so they try to stay shush about the situation.

Looking for Quick Returns: The investors get allured by the idea of quick returns when it comes to IPO investment. Let's talk about a recent IPO in 2020 of burger king where it gained more than 100% on the first day. The price later remained plateaued but, in many cases, it can fall sharply due to correction. Getting an IPO allotment of a good IPO is like winning a lottery. Investing in IPOs for gaining listing gains is like a speculative venture. You should rather invest in an IPO for the long term. Don’t worry about its gains and losses rather figure out its worth.

Small allotments give fewer overall opportunities to retail investors and investors get few shares against their bid. In such a case investing in IPO becomes pointless as the overall returns are affected and are on an absolute basis.

Ignoring valuations: Investing in a company is about purchasing it at the right price for the ownership of shares. You should know if the business is doing great? Will they be able to provide profits, improvement, and consistent growth? What is their MOAT or competitive advantage? Is management confident or lacks confidence? All of these questions will determine the ‘right’ price of the share.

Not knowing the risk: There are risks in IPO investment that most investors are not aware of. IPOs work great in fair weather or stable market. When there are bullish sentiments in the market, many IPOs are ready to get listed. When the collection of an IPO is high the chances of a market correction are pretty high. The retail investors are having the risk of getting caught up in a bullish market and thus witness losses when the trend is reversed.

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Investing in an IPO

You can earn a handsome amount by investing in an IPO if you have some expertise. The investors can go through the prospectus of the company to make their choice. The need for going through the prospectus is vital. You need to be careful while you do the same and you must have a clear understanding of the opportunities they have. Additionally, these IPOs take place in the primary market where the new securities are issued for the very first time. It can be freely traded once entered in the open market by the public.

Conclusion

To sum it up, An IPO is an initial public offering or launching of stock. It is a public offering where the company goes public and lists the share on the stock exchange for the first time. Companies come up with an IPO to raise capital for future growth prospects and expansions. You can earn a handsome amount by investing in an IPO if you have some expertise. The investors can go through the prospectus of the company to make their choice. There are risks in IPO investment that most investors are not aware of. IPOs work great in fair weather or stable market. The retail investors are having the risk of getting caught up in a bullish market and thus witness losses when the trend is reversed.