These days, in virtually every conversation I have, I am asked a question on an IPO.
What is your view on the Royal Orchid Hotels?
Should I try for GVK Power?
Is Sadbhav Engineering a good bet?
And so on and so forth.
A number of my friends are all set to invest in them but have no clue about the company or the stock market in general. Yet, they are convinced that IPOs are a good way to make money.
This is true to a certain extent. When the stock market is on fire, everybody seems to be making money on IPOs. Well, almost everybody.
For example, those who subscribed to high-profile IPOs like Jet Airways and HT Media don't seem to have had such a good deal (we will explain the reasons later in this article).
We should also never forget the amount of money people lost in the mid-nineties when fly-by-night operators decamped with hundreds of crores worth of investors' money.
Before you decide to invest in an IPO, do read this series on IPOs and how to make a wise choice.
We are flagging it off with a quick lesson on the basics.
What are IPOs?
The most common way of investing in shares is buying them on the stock exchange. This is referred to as the secondary market.
But there are companies that are not listed. This means, their shares are privately held and they are not available for buying and selling in the stock exchange.
When these companies decide to issue more shares and list them in the stock exchange, it is referred to as an Initial Public Offering. This is the first time their shares will be available to the public for buying and selling.
The market for IPOs is referred to as the primary market.
Sometimes, companies that are already listed come out with a fresh lot of shares. Bank of Baroda is a recent example.
This is not referred to as an IPO (since they already have shares trading in the secondary market); it is called a new issue. It's also called a Follow-on Public Offer, an FPO as against an IPO.
Why invest in IPOs?
This brings us to the question: Why invest in an IPO? You can buy the shares from the stock market when it lists on the exchange later.
The reason is simple: you get it cheaper.
Often, companies come out with a cheaper issue price. An issue price is the price at which you can buy a share when you apply for an IPO.
When the shares are listed on the stock exchange and are available for trading, the price generally rises.
Take, for example, the Jet Airways IPO. It had an issue price of Rs 1,100 per share. On March 14, 2005, the day it was listed and made available for trading, the price rose to a high of Rs 1,339. In just a few weeks, you would have made a profit of more than Rs 200 per share.
So, besides getting the shares cheaper, those who want to make a quick buck sell it soon after it is listed. Within a short span of a few weeks, they make a neat profit.
This is the reason why investors flock to IPOs.
When it could backfire
It is not mandatory that the price of the stock rises on listing. There could be instances where it does not. So, if you are looking at selling the moment it is listed, you could be making a big mistake.
Also, much depends on the timing of your sale. The price may rise on listing, but you may hold on for just a few days longer and it could slump.
Those who invested in the Jet Airways IPO at Rs 1,100 per share were thrilled as the share price kept rising.
Soon after listing (as we mentioned above), the price rose. On March 14, 2005, it was Rs 1,339 per share and rose to Rs 1,361 per share on June 1, 2005.
However, after that, it has generally been going downhill. On December 6, 2005 it touched Rs 1,269; on January 6, 2006, it was Rs 1,148.
On February 3, 2006, it was Rs 983.
Those who did not sell at the initial levels would be rather dismayed.
The HT Media IPO is another case in point. It came out with an issue in August 2005 at an issue price of Rs 530. On September 1, 2005, it touched a high of Rs 731. On January 6, 2006, the price was Rs 465.95.
Remember, the best reason to invest in an IPO is because you believe in the company and are willing to hold on to the shares for the long term.
Often, companies that are going public (listing their shares for the first time) offer their shares cheap and go on to become very successful.
An IPO thus offer investors the chance to participate in the company's potential prosperity.
While the chief attraction may be making a profit the moment the price of the share rises, don't let it be the only one.
This is the first part in our series on IPOs.
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