Thanks to the upward trend in stock market investments, numerous investors are participating and investing in IPOs to generate returns and diversify their portfolios. While making shares public, IPO listing is a bold step forward for issuing companies. This is because it attracts substantial attention from potential investors. Also, it is the first time that they go public. 

 

But what is an IPO listing? Learn more about the same, the advantages and disadvantages of an IPO and other alternatives below.

What is an IPO Listing?

An IPO listing occurs when shares of a private company are listed on the stock exchange, making them available for public trading, for the first time. Once the IPO is listed, you can purchase or sell these shares with the help of a stockbroker in the stock market. 

 

An IPO initiates within the primary market. Once the issuing company's shares are made available on the stock exchanges, they get integrated into the secondary market.

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What are the Advantages and Disadvantages of an IPO for an Investor?

  • Check out the advantages that come with an IPO.

1. Gains on Listing Day

A major benefit of investing in an IPO is the potential gains on the listing day. Companies assess the value of their stocks and indicate the offer price on the prospectus. You can then apply for a designated quantity of shares for this price. If, on the listing day, the price is trading above the price at which they were acquired during the IPO application, it results in a listing gain.

2. Ownership in the Company

When you purchase company shares, you become a key shareholder, and enjoy portions of the profits. Your status as a shareholder in the company grants you the authority to provide your opinions. In case you disagree with a decision, you have the right to voice your opposition in the company’s general meetings.

3. Enhanced Liquidity

Another advantage of investing in an IPO is that you enjoy enhanced liquidity. When a company becomes public, you can sell the company’s stock as per your wishes. This enables you to actualise profits without needing to wait for the shares to be bought back. 

4. Long-Term Advantages

You also get long-term advantages by investing in an IPO since you buy the shares directly from the company. You also have access to the red herring prospectus, like every investor. This helps anticipate when the company might experience fluctuations and also when it may grow. Accordingly, you can decide to sell your position, hold, or invest further. 

5. Price Transparency 

The price of each security is clearly provided in the IPO order document, providing equal information to every investor. However, after IPO listing, stock prices depend on the market and your broker, providing a major benefit for you.

  • Here are some of the disadvantages that are associated with an IPO.

1. Time-Consuming

Investing in IPOs can be a time-consuming process since you need to research the historic performance of the company, their management, and other essential components before investing. Furthermore, IPOs have predetermined quotas for various investor categories, accompanied by a long procedure that you need to follow to participate in an IPO.

2. Risks and Volatility 

Another disadvantage of investing in an IPO is that shares are offered on a subscription base, and numerous applicants apply for the same number of shares. This means that there is no assurance that you will receive shares. 

 

Also, IPOs usually have some initial volatility, which may cause the price to drop and negatively impact your investment.

What are the Alternatives to an IPO for Investors?

There are some IPO alternatives that you can explore.

1. Secondary Market Trading

An alternative to IPO investments is secondary placement opportunities using different platforms. These platforms allow you to list your stocks and convert them into funds. You can do so through the available liquidity windows connected to diverse investors.

2. Mutual Funds

Another great investment option if you do not prefer IPOs is mutual funds. In these financial instruments, your investments are pooled and further invested in securities like bonds, stocks, and other instruments. Professional fund managers manage them and aim to yield great returns.

3. Corporate Bonds

Investing in corporate bonds can be the right choice if you are a risk-averse investor and aim for consistent returns. These debt securities are issued by corporations, providing an avenue to potentially earn stable profits and help you stay ahead of inflation.

 

Going for an IPO listing is a crucial step for an issuing company since it offers an opportunity to enter the market and offer investments to the public. If you are planning to invest, remember that stock market investments are subject to risks, especially IPOs. 

 

Therefore, you need to research and assess the company’s past performance and other factors before finalising your investment.

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FAQs About IPO Listings

What is the secondary market in IPOs?

The secondary market is the platform where you can trade securities after they are traded for the first time in the primary market.

How is the listing price of an IPO determined?

The IPO listing price is determined by investment bankers appointed by the issuing companies. They establish a price by taking into account the company’s financial position, future growth prospects and other essential factors.

When can I sell my IPO?

You are allowed to sell your IPO after completing the compulsory lock-in period that lasts for 6 months. This lock-in period is essential for preventing the abrupt selling of shares, which can lead to a decline in the market value of shares.

Can I purchase IPO shares on the day of listing?

Yes, you can purchase the IPO shares after 10 PM on the day of the IPO listing.

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