Unlearning the Common IPO Myths

While there are innumerable myths related to IPO, we have filtered them into critical pain points affecting its investment. Here are the most common IPO myths to debunk right away to make informed decisions:

 

#1 All IPOs are High-risk, High reward

One of the most common myths about IPO is that the higher the risk in the IPO, the higher the returns. Like other avenues of the stock market, the fundamentals of an IPO do not work like this. For example, higher returns lead to higher risk. As you undertake higher risk, it is not necessary that you automatically earn higher returns.

 

For instance, IPOs like Paytm or Policybazaar were high on risk, but they didn't give higher returns. Contrarily, the Adani Wilmar IPO was lower on risk but gave huge returns after the IPO allotment process.

 

There are various PSUs whose IPOs were low on risk but have also given lower returns. If you are taking a higher risk, it is not a mere assurance that you will receive higher returns. So, make sure you consider other factors as well before investing in IPOs.

 

#2 The IPO Company is Financially Stable

An IPO is launched when a firm requires funding. So, it is not necessarily true that IPO companies are financially stable. There are two broad reasons as to why a company goes public. 

 

Firstly, they need funds to undergo business expansion. These reasons demonstrate that the company may make profits on their investment. It also shows that the company needs an IPO for future growth. 

 

Secondly, a company may require an IPO to repay debt. It shows that the company is financially unstable. If you tend to invest under such a scenario, there will be fewer chances of earning profits. 

 

#3 The Share Price always Stays above the Issue Price

It is the biggest misconception that the share price is always above the issue price. However, the fact is that the share price depends upon the market forces and the demand and supply of shares. Sometimes, even the share prices of huge companies fall drastically when the shares get listed.

 

So, you should not fall into the trap of high issue prices and assume that the share price will be higher after listing. Beware of this myth because a lot of retail investors have lost huge amounts of money due to this issue of price illusion.

 

#4 Investing in any IPO Makes You an Early Investor in that Company

Another common myth of IPO is that investing in it makes you an early investor in that company. While it is true that most of these IPOs are launched by entrepreneurial companies and investors bet on new businesses, however, TCS speaks another story.

 

Taking the example of TCS itself, it became public approximately 30 years after its formation. Similar instances belong to Godrej and Wipro. These companies have already undergone several rounds of investment & funding from VC investors and PE funds globally.

 

#5 An IPO Must be Good if There is so Much Excitement Surrounding it

Every time a new IPO is announced, investors get quite excited. Because of the company's prominence, the magnitude of the IPO, or other considerations, some IPOs generate more noise than typical. This, however, does not imply you should invest in an IPO blindly when there is so much hype around it.

Because of PayTM's massive issue size and intensive marketing, it generated a lot of buzz in the markets. Within a day or two, the IPO was oversubscribed due to the excitement of many investors. But when it was listed, it performed horribly.

 

Conclusion

IPO is such an intriguing term in the stock market that excites every investor. Most IPOs witness a heavy deal of oversubscription. However, it doesn't mean that every investor should invest in that particular IPO blindly. Whether you need to invest in a particular IPO or not, you should consider some important things.

 

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Disclaimer: This blog is posted solely for educational purposes. The securities mentioned are examples and not recommendations. It is based on various secondary sources from the internet and is subject to change. Please consult an expert before making any related decisions.