Should you invest in an IPO only for listing gains?

Just like there are two sides to a coin, there are pros and cons of investing for listing gains and long-term investing. Let us understand these.

Mar 26, 2021 09:03 IST India Infoline News Service

Initial Public Offer, IPO
Riding high on the current bull market, it is raining Initial Public Offer (IPOs) again. These IPOs are being lapped up by retail and institutional investors alike with oversubscription levels reaching the highs of 198 times (Mrs. Bectors Food) and average of ~56 times. Everyone is looking to bask in the glory of this upcycle. Ample liquidity, some new-age businesses tapping into the bourses and improving prospects of the economy are factors fueling this optimism.

Interestingly, more investors are eyeing listing gains rather than long-term returns from these newbies. A look at the data reveals just why. According to Prime Database, 16 out of 21 IPOs so far in FY21 (till March 10) listed with premium on the debut day. 5 of these 21 stocks have doubled since their listing. Majority of these companies have managed to retain the gains so far. These facts are enough to add fuel to the fire.

However, this frenzy also gives rise to several questions. Are the high valuations sustainable? Is there a bubble brewing just below the widespread optimism? Should retail investors chase listing gains or adopt a longer term approach?

Answers to the first two questions will be uncovered in due course of time. Let us try and address the last question today.

Just like there are two sides to a coin, there are pros and cons of investing for listing gains and long-term investing. Let us understand these.

Investing to clock-in listing gains
Pros
  • Likelihood of short-term, quick returns
  • Allows quick churning of money between stocks
Cons
  • No assurance of up move on listing day
  • Possibility of listing gains wearing thin or even reversing in a short time
  • Very high valuations
  • No need to do in-depth research or analysis on the company


Investing for the long term
Pros
  • A better understanding of the company fundamentals
  • Investor benefits from capital appreciation as well as dividends received
  • No need to churn investments frequently
  • Opportunity to enter the stock on dips
Cons
  • May take longer-than-expected time for significant capital appreciation
  • Any adverse corporate action by the company

As we have seen, both approaches have positives and negatives. An individual’s risk appetite, investment objectives and understanding of the markets are key factors driving either of these decisions. None-the-less, investors should be aware of the risks inherent in equity investment and constantly monitor the latest developments. Happy investing.

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