Companies issue Initial Public Offerings (IPOs) to raise capital that can be used for multiple purposes, including R&D, new project development, business expansion, and clear/reduce existing debt. IPO changes the status of a private company to a public company. After an IPO, which is the issue in the primary market, the company’s stocks get listed and are available on stock exchanges for sale and purchase in the secondary market.
Amid the ongoing IPO fever, retail investors are getting fascinated with the appealing IPO returns increasingly. But before putting your money in the IPO Investments, you should know about listing gains through trading in these public issues. After that, you can consider IPO investing using your demat account. Demat full form, in online stock trading, is dematerialization.
What exactly are Listing Gains?
- In simple words, listing gain is the profit you receive after the IPO issuing company’s shares are listed on the stock exchange and traded among investors.
- In another view, the difference between the share’s opening price after listing and the allotment price is referred to as the listing gain.
For example, if you apply for the Company A IPO at Rs. 100 as per the price band of 98-100, and wait for the listing date. On the listing date, usually 7 – 12 days from the opening of the IPO, the stock is traded at 150. Then your listing gain will be 50%. However, it is not as simple as it looks. Many factors affect listing price, thus listing gain. Let us elaborate on the IPO process.
A merchant banker evaluates the IPO issuer company’s share value after considering numerous factors in line with the Securities and Exchange Board of India (SEBI). Then, a price band is set for the subscription. Investors need to bid for the IPO issue within this price band.
- After the end of the subscription period, the company allots shares to investors and fulfills certain formalities within 7 to 12 days before its shares debut on the stock exchanges. Here the IPO listing process gets complete, and the company’s shares are finally available for trading.
Now, here can be scenarios:
- Shares get traded at a higher price than the allotment price. Or
- traded at a lower price.
It means there is no guarantee that a stock’s opening price will always be higher to provide you gain.
- The listing gain depends on the market sentiment, its demand in the market, the short-term and long-term outlook among investors as many investors retain their money in the IPO with the focus on the company’s long-term growth.
- You should note that an oversubscribed IPO does not mean a high opening price. There is nothing for an established link between oversubscription and listing gains.
- Oversubscribed IPO reflects the high demand for the company’s shares. But it does not confirm listing gains. An average listing return of IPOs has been 36%, kindled by an average oversubscription rate of 71.3 times, and it is the highest profit percentage in a decade.
The scenario and strategy of IPO investing vary by investors based on the financial goals and risk appetite. Some consider short-term returns via listing gains, and others wait for a long haul.
Long-term investors are high in percentage and proved wise to invest in IPOs. What you need to ensure is that the issuer company enjoys solid fundamentals that lead to huge long-term growth prospects. Another point is that you should understand the business of the issuer and the risks involved in it.
Thus, determine your financial objectives and risk tolerance capacity for IPO investments.
Hi, I am Nancy Ahuja. I am a professional Financial Analyst in Pune. I have done a post-graduate in finance and working with a reputed financing company. I love to write about business and finance.