TomorrowMakers

Common mistakes while investing in IPOs!

Common mistakes while investing in IPOs

The Indian stock markets have witnessed a spate of IPOs in the last couple of years. The Indian markets performed well after the initial drop because of the covid pandemic. This meant that many firms came out with their IPOs to benefit from the soaring valuations. Many investors have invested in these IPOs, but now many people are feeling trapped in their IPO investments. 

Investing in IPOs or any stocks is subject to market risk. But with IPO investments, the risks are more, and people often make mistakes when applying for IPOs. The reason that people make mistakes is that people do not fully understand the details. Here we bring the common mistakes people make when investing in IPOs!

Related:  All about IPOs in India

Common mistakes people make when investing in IPOs!

There are many mistakes that people make when investing in IPOs. We have summarized the four primary mistakes:-

  1. Completely ignoring the valuations- When you invest in a company, you benefit if you have underpaid or paid a discount to the fair valuation of the company. But usually, the IPOs are overpriced by the investment bankers to maximize their profits. This means that there is a high chance that you are overpaying for the issue. If you ignore the valuations, in some time, the valuations will come back to haunt you. This has what has happened in recent start-up IPOs like Zomato, Paytm, Cartrade Tech, etc. 
  2. Quick returns- Most investors who invest in IPOs, look for short-term returns only. They are looking to make a decent amount in a very short period of time. If the issue is underpriced, this can work, but usually, the issue is overpriced. This means that when you are looking for short-term returns, you might actually face a loss in the short term. You will always hear some stories of where the IPO was oversubscribed and listed at the double the price. But these kinds of stories are rare, and also, because of the oversubscription, it is possible that the retail investor did not get any allotment.
  3. IPOs are launched in bull markets- Most IPOs are launched in bull markets so that the promoters and the investment bankers benefit from the high valuations. This is the reason that when markets are going strong, we have a spate of IPOs. If you check any bull market in the past, most IPOs would have been launched in that period. This means that when we have a subsequent bear market, the IPOs start to underperform. 
  4. Lack of information- when IPOs are launched, the information is very limited. Also, the average retail investor does not know how to read the DRHP. The analysis of the IPOs is also not very detailed. Also, we have not seen how the new company will perform in the markets. This lack of information means that retail investor can lose money when investing in IPOs. 

Related: Is your IPO rightly valued?

What should you do when investing in IPOs?

If you are a retail investor looking to invest in IPOs, you should do your due diligence. Also, you should look beyond the listing gains and the grey market premium. You should look for companies with good governance and a good track record, just like when you are investing in listed stocks. You should not treat IPO as a separate entity from the average stocks. Most probably, the IPO will be overpriced, and therefore, if you find cheaper alternatives in the listed markets, you should buy those stocks rather than investing in IPOs. Also read How IPOs differ from NFOs?

IPO Buying Guide