Should you invest in an IPO or before the IPO

Sunday, Mar 17, 2024

Investing in IPOs is gaining attraction nowadays.Reliance Industries was the first company in India to bring an IPO in India back in 1977 when its shares were offered to the general public. Things have changed a lot since then. Many new regulating and non-regulating changes have come into the market which has made the life of investors a lot easier. Many times, people have several questions in their minds, whether they should invest in an IPO or before the IPO which in the secondary market is termed as Pre-IPO investing. So, let us try to observe both the perspectives, benefits & risks associated with them. At last,you can make choices for yourself and invest.

It is simple to apply in an IPO. When the company opens for IPO allotment, one can apply for the IPOs from their stockbrokers’ app. Apps keep on pushing notifications on recent IPOs. If the issue of the company is subscribed multiple times, then it becomes difficult for the investor to get an allotment.

Some investors invest in the IPO for the short term maybe for listing gains whereas others look for long-term value creation. Here are the advantages of investing in an IPO

  1. It increases liquidity for the investor, as it becomes easy for him to buy or sell the shares in the primary market whenever he wants.
  2. There is no lock-in period if you buy an allotment in IPO. You can sell the shares on the listing day of the stock. One can also take listing gains by selling his shares on the first day itself as soon as the stock gets listed.
  3. Investors become eligible for discounts, bonus stocks, and other incentives offered by the company.

Some of the risks are

  1. There are high chances that a person doesn’t get an allotment. 
  2. Nobody knows whether the company will list at a discount or premium to the IPO price. This could be worrisome for investors.
  3. There is no guarantee that the stock will increase in the future even if the company opens at a premium.

Buying Pre-IPO shares is generally a good option. Pre-IPO can be bought at a price lower than at the time of IPO. Several have emerged now that sell Pre-IPO shares. Some of the ESOP liquidating funds like EquityZen,Qapita, and Rulezero could help investors to buy Pre-IPO shares.

Now let’s discuss the pros and cons of buying Pre-IPO shares.

Pros

  1. Chances of making huge profits as these shares are available at a cheaper price than at the time of IPO.
  2. These shares are meant to be kept for the long term.
  3. Pre-IPO shares are less affected by market sentiments as they are not regulated by SEBI.

Cons

  1. The investor has to face a lock-in of 6 months after the stock gets listed. 
  2. These investments are illiquid until the company goes public.
  3. IPO doesn’t go well in the public market.

Investors expecting to make huge profits should be aware of the ups and downs of IPO and Pre-IPO shares. If the person has money and can afford to invest for the long term, should invest in Pre-IPO shares. But if the investor is looking to invest for the short term then he should invest in the IPO. Pre-IPO shares have the chance to reap more profit for the investors. Investing in an IPO is a safe call and investing in Pre-IPO shares is risky. People should invest with the right strategy and according to their appetite.

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