The IPO market in India is witnessing increasing levels of activity. An Initial Public Offering, also known as an IPO, is the procedure of providing company shares to the public. The shares are offered through the new stock issuance for the first time. With an IPO, a company can raise equity capital the public investors.
The change from a private to a public company can be essential for private investors to realize profits from their investments completely. However, there are certain challenges associated with IPOs. The short-term tactic of flipping your shares is pretty common in the trading world.
Most individuals expect to make good gains on a listing day. But as a retail investor, the riches shouldn’t lure you. Before opting for an IPO subscription, you should be aware of the challenges associated with it. In simple words, merely knowing about the benefits of IPO wouldn’t be enough.
To have a solid investment plan, you should consider the downsides too. Many organizations use IPOs to increase the amount of available financing to the organization and generate billions for the owners. Here are some top challenges associated with investing in IPOs.
You may not have access to the Shares
One of the biggest challenges you may face while bidding on an IPO is that you may or may not be allotted shares. Moreover, if the IPO is oversubscribed, investors may not be allotted any type of share.
Moreover, there can be instances where you’ll be allotted fewer shares than what you applied for. For instance, you may have applied for fifty shares. However, you end up getting only ten of them.
Note that if the upcoming IPO in 2022 that you’re planning to bid for is popular, the chances of the company’s issue being oversubscribed are higher.
In other words, you can never expect to get the exact number of shares in an IPO. Hence, before investing in an IPO, you should have a backup plan. And because there are uncertainties, you shouldn’t expect much from the IPO investments.
You should refrain from buying costly things or planning a luxury vacation just because you’ve invested in an IPO.
The Volatility of the Listing Day
Volatility is another major risk that can derail your IPO investment plans. However, it is more relevant when you are investing in an upcoming IPO. When the stock is in the initial trading phase, the prices can be volatile. Moreover, the newly listed shares also exhibit price fluctuations based on the ever-evolving sentiments of the investors.
On a listing day, it is more noticeable. A large number of stocks show a great deal of price variations on a listing day. The price can rise or fall based on various market factors. If you are expecting the price to plummet on a listing day, you should refrain from investing in IPOs.
Overvalued Shares
With respect to the higher volume of IPOs, it is fair to expect that most of these shares won’t be fairly valued. And if an IPO is undervalued, it bodes well for the investors. This is because certain types of market factors will bring the price up to its right level.
However, the demand for IPOs in the Indian market is pretty high. Moreover, with high liquidity, many IPOs are priced above their intrinsic value. In simple words, when the stock price corrects, it will get attain its true value.
This will lead to losses for the IPO investors who were associated with it for longer durations. In IPO investment, expensive valuation is a red flag. With the help of some fundamental analysis, you should consider investing in IPOs.
Inability to Gather Sufficient Information about the Company
If the company going for the IPO is new in the market, you may find it difficult to get quality information. Always remember that investing in a company’s IPO without prior research can be risky.
Moreover, inadequate financial information about the company can adversely affect your investment chances. For good IPO investments, you should be relying on crucial metrics based on financial information. These metrics are integral to the success of your investment in IPOs. If the upcoming IPO is from a company with little financial information, don’t invest.
Fragmented Broker Landscape
Even skilled brokers may not have enough links with all underwriters in the current financial market. It is a major disadvantage because the best way to purchase shares in an IPO is through the retail broker. The underwriters typically provide these brokers with a large number of shares.
You should consider these risks before investing in any IPO in 2022. It is essential to have a solid plan before investing in IPOs. IPOs can be volatile, and that’s why the right measures are essential for the right investment decision. You should also have a good backup plan to ensure safety.
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