To raise capital, companies tend to bring in investors to get the required funds and get the company back on its feet. However, companies try out for an IPO, provided they have some market structure and recognition. IPOs are quite deliberate as they provide a whole new scenario of how investors can safeguard their investment for the long term. But not all IPOs are profitable.
If you are a sensible person thinking to grow your money, you would invest in real estate, mutual funds, FD’s, gold, and things that hold value over the long term. But if you want your investment to grow but have a demand in the market that you own a part of, IPO comes to the picture. Before that, you must keep your IPO basics clear.
Though they might be as beneficial as they seem, there are several downfalls that one should consider before investing in them.
Why Shouldn’t You Invest in an IPO?
1.Very expensive
IPOs aren’t meant for everyone. The “I” in IPO stands for initial, and the prices of getting a small allocation are relatively high. If you’re ever looking for a significant financial gain out of an IPO, then you will need to invest a minimum of one lakh rupees depending upon the IPO. Do keep in mind that an average investor wouldn’t compete with other investors with their financial power.
A thumb rule of investing in an IPO is to see the attraction it is getting. Suppose investors are flocking like a herd in the IPO. In that case, it’s quite expensive to invest in. If there are not many investors applying for the IPO, it might spark a red flag about the popularity and growth of the IPO. Finding a sweet spot between these two categories is required.
2. Valuation downfall
Not all IPO’s are going to live up to their names. Meaning that they will lose their value over time provided they perform deliverables and promises about the company’s growth. “Never judge a book by its cover,” and this resonates perfectly while investing in an IPO.
If the IPO you are willing to invest in hits off, you’ve made a calculated investment. If not, you will lose all your investment over some time. It’s a risk that may or may pay off. It all comes down to the company’s valuation and how well it can uphold its valuation to the best of its promises.
3. Impulse investment
FOMO is the correct terminology to explain why investing in an IPO is a bad idea. When a popular personality or investor might tell you to invest in a platform, it doesn’t mean that you need to.
Firstly, you need to assess your financial plans and decide whether the investment will be worth it or not. Especially when we are talking about an IPO’s negatives, there are so many chances of you losing your money. Moreover, looking over the long-term profitability of IPOs is the correct stance rather than thinking about short-term gains.
4. BULL market investments
There are often trends where companies prefer to launch their IPO during the BULL market, which provides higher chances for companies to have a better valuation. Neglecting the risk of any investment, getting returns is higher, which poses a more significant risk in the long term.
For investors, it can catch you off guard if the BULL market turns into a BEAR market and could cause you to lose plenty based on your investment.
5. Oversubscription
Oversubscription is one of the biggest downfalls that might lead and investor to consider that IPO for potential investment. However, the information should be taken with a pinch of salt as it means nothing, and you shouldn’t make your investment based on the number of subscriptions.
If you break down the subscriptions into seeing the percentage of oversubscription made, then you can come to know whether the IPO is worth it or not.
Bottom line
IPOs are a great long term investment opportunity provided you know the company’s condition, its valuation, and its long-term goal. If you get an IPO allotment, then making a significant profit on the listing day is possible because of the hype generated around the IPO. However, it’s all a hype bubble waiting to explode and the valuation come crashing down if the company doesn’t live up to its name.
If you want to invest in an IPO, then try to research as much as possible about upcoming IPOs and ensure that you consult an investment guru regarding your investment strategy.
Furthermore, try to assess options other than an IPO, as for the money invested in an IPO, you could get better opportunities elsewhere for a long-term benefit. Rest, it is all based on your preferences and goals!
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