Is Investing in IPO Profitable?

Is Investing in IPO Profitable

Zomato’s impressive stock market debut is likely to pave the way for other large internet firms to raise capital from the general public. This is the start of a new chapter in India’s primary market, which has had a tumultuous history since multinational corporations were compelled to sell shares to the public under a new law.

However, as has been repeatedly demonstrated, IPO investors do not always achieve a profit every time, and in many cases, investors have burned their fingers and suffered massive losses. Nonetheless, the herd mentality of investors motivates them to subscribe to IPOs.

There is no doubt that many IPOs have provided investors with enormous returns in the past, but these are respectable exceptions to the rule. The truth is that most IPOs offer lower returns when businesses are in a bear market.

The root of the issue is right here. During a bullish trend, promoters and initial investors typically launch IPOs to capitalise on the booming industry and obtain a high price for their shares.

Since the current conditions create a high demand for IPOs, these offerings are frequently oversubscribed. Stock prices may become overvalued during the Bull Run due to the high demand for stocks in the market, and some IPOs may provide a good return to shareholders upon listing.

 However, when economic conditions turn bearish, the high prices of these stocks plummet, leaving investors in the dust.

The following are some of the major IPOs that have disappointed investors:

Reliance Power: 91.84% drop from the listing price.

HDIL Ltd is down 89% from its initial public offering price.

DLF Ltd: 76.70% decrease from the initial listing price

The dot-com boom of 1999 that busted in 2000, the housing market and infrastructure boom of 2007 that busted in 2008, and the recovery of 2010-11 that bottomed out in the following years were all notable booms and busts. Since 2015, the industry has been on a tear, with a record number of IPOs taking place in 2015 and 2016. In 2017, the boom is still going on.

As a result, the message of the story is that shareholders should not chase IPOs blindly and should be selective when subscribing to IPOs. They must conduct thorough research and subscribe only to IPOs of companies with excellent business models that are solid and consistent and in good financial shape. Only then can they expect to see a profitable return.