What are the top 10 reasons for investing in IPO?

What are the top 10 reasons for investing in IPO? image

Here are the top 10 reasons why you should invest in IPO

1.  Low Risk Investment  – After the change in rule for IPO allocation process (somewhere around 2013), it doesn’t really matter whether you have invested in full quota of Rs.2,00,000 or a single lot of about Rs.15,000. If the IPO is subscribed more than 100%, the allocation is based on per application and not based on the number of lots you have applied for. In an IPO which is not subscribed 100% you would rather not risk your hard earned money anyway. This makes IPO a very low risk investment. Moreover you can visit sites like smartinvestment and chittorgarh to look at the grey market premium to decide whether you want to invest in that IPO or not. More the value of grey market premium or subject to sauda, higher the chances of that IPO listing on higher value. There are few instances where you might see this trend deviating but it’s very less.   

2.    Listing gain – For IPOs with good fundamentals and lower price, you might see a listing gain of more than 100%, the listing gain of 30% - 40% is quite common even for an average IPO. You can have your strategy to trade in IPO just for listing gain. 

Here are some of the examples of IPOs where listing gain is more than 100% in last 1 year…

  • Avenue Super Marts Limited IPO – issue price Rs.299.00 – listing day price – Rs.641.6
  • CDSL IPO – issue price Rs.149.00 – listing day price – Rs.261.6 more details can be found at 
  • Astron Paper & Board Mill Ltd IPO – issue price Rs.50.00 – listing day price – Rs.120.75
  • Salasar Techno IPO – issue price Rs.108.00 – listing day price – Rs.262.5

Here are some other examples where listing gain is more than 30%

  • BSE limited IPO – issue price – Rs.806.00 – listing day price – Rs.1069.2
  • Shankara Building products IPO – issue price – Rs.460.00 – listing day price – Rs.632.45
  • AU Financiers – issue price – Rs.358.00 – listing day price – Rs.541.65  
  • Cochin Shipyard IPO – issue price – Rs.432.00 - listing day price – Rs.528.00

3.    Easy to Evaluate – The dilemma in stock most of the time is to pick the right one which gives you a good profit. With IPO it is easy to evaluate. There are lot of sites like chittorgarh and smartinvestment which provides you the GMP and Subject to Sauda Value. Most of the time these numbers are correct and you can guess from these number what the listing price will be. Beside that 90% of the IPO in last one year has been profitable.


4.     Get a Hack on Stock Market – If you are new to stock market, this will help you get a hack on the stock market. With just Rs.15,000 you can know how the stock market works and you can make some profit in the process of learning as well.


5.    No need of huge Bank Balance – You don’t need to be super rich to invest in IPO. Gone are the days when chances of allocation were higher when people used to invest for Rs.2,00,000. All you need is Rs.15,000 and stand a equal chance of allocation as a person investing Rs.2,00,000


6.    No Brokerage on Purchase – As you are directly investing in IPO, you don’t need to pay brokerage for the purchase of IPO. However you will have to pay brokerage on sell but you still are saving a few bucks there.

7.    Potential upside is high – Because it’s a new listing, the potential upside is very high if the company’s fundamentals are good. With the company’s progress, your investment will go up as well. Some of the IPOs can be really good for long term investment.


8.    Almost zero time invested – Ever heard of I don’t want to invest in stock market because it eats up lot of my time, I don’t have the time to analyze the stock market etc. With IPO, it literally takes 2 minutes to invest. All you need to do is go to your broker and apply for the IPO. The money is blocked from your account and is released only when you are allocated the IPO. The analysis again is just few web sites, look at the IPO Grey Market and make your decision. 

9.    Discounts for Retail Investors – Lot of the IPOs give discount of 5-10% for Retail Investors. It’s almost like 5% profit even before it is listed compared to HNI 


10.    ASBA – Gone are the days when your money was sent to the company for IPO and it was refunded back to you if you don’t get the allocation. The entire process used to take more than a month. With ASBA, when you apply for IPO, the amount is locked with your bank and released when you not allocated the IPO. You still will receive interest for the period it was locked.


If you would like to know more on investigating in IPO, please post a message here. You can also provide your feedback if any on IPO investment.
 

Here are the 5 Tips for IPO investment...

1. Objective Research Is a Scarce Commodity

Getting information on companies set to go public is tough. Unlike most publicly traded companies, private companies do not usually have swarms of analysts covering them, attempting to uncover possible cracks in their corporate armor. Remember that although most companies try to fully disclose all information in their prospectus, it is still written by them and not by an unbiased third party.

Search the Internet for information on the company and its competitors, financing, past press releases, as well as overall industry health. Even though info may be scarce, learning as much as you can about the company is a crucial step in making a wise investment. On the other hand, your research may lead to the discovery that a company's prospects are being overblown and that not acting on the investment opportunity is the best idea.

2. Pick a Company With Strong Brokers

Try to select a company that has a strong underwriter. We're not saying that the big investment banks never bring duds public, but in general, quality brokerages bring quality companies public. Exercise more caution when selecting smaller brokerages, because they may be willing to underwrite any company. For example, based on its reputation, Goldman Sachs (GS) can afford to be a lot pickier about the companies it underwrites than John Q's Investment House (a fictional underwriter).

However, one positive of smaller brokers is that, because of their smaller client base, they make it easier for the individual investor to purchase pre-IPO shares (although this may also raise a red flag as we touch on below). Be aware that most large brokerage firms will not allow your first investment to be an IPO. The only individual investors who get in on IPOs are long-standing, established (and often high-net-worth) customers.

3. Always Read the Prospectus

We've mentioned not to put all your faith in it, but you should never skip reading the prospectus. It may be a dry read, but the prospectus lays out the company's risks and opportunities, along with the proposed uses for the money raised by the IPO.

For example, if the money is going to repay loans, or buy the equity from founders or private investors, then look out! It is a bad sign if the company cannot afford to repay its loans without issuing stock. Money that is going towards research, marketing or expanding into new markets paints a better picture.

Most companies have learned that over-promising and under-delivering are mistakes often made by those vying for marketplace success. Therefore, one of the biggest things to be on the lookout for while reading a prospectus is an overly optimistic future earnings outlook; this means reading the projected accounting figures carefully.

You can always request the prospectus from the broker bringing the company public.

For more, read Don't Forget to Read the Prospectus.

4. Be Cautious

Skepticism is a positive attribute to cultivate in the IPO market. As we mentioned earlier, there is always a lot of uncertainty surrounding IPOs, mainly because of the lack of available information. Therefore, you should always approach an IPO with caution.

If your broker recommends an IPO, you should exercise increased caution. This is a clear indication that most institutions and money managers have graciously passed on the underwriter's attempts to sell them stock. In this situation, individual investors are likely getting the bottom feed, the leftovers that the "big money" didn't want. If your broker is strongly pitching shares, there is probably a reason behind the high number of these available stocks.

This brings up an important point: even if you find a company going public that you deem to be a worthwhile investment, it's possible you won't be able to get shares. Brokers have a habit of saving their IPO allocations for favored clients, so unless you are a high roller, chances are good that you won't be able to get in.

5. Consider Waiting for the Lock-Up Period to End

The lock-up period is a legally binding contract (three to 24 months) between the underwriters and insiders of the company prohibiting them from selling any shares of stock for a specified period.

Take, for example, Jim Cramer, known from TheStreet (formerly, TheStreet.com) and the CNBC program "Mad Money." At the height of TheStreet.com's stock price, his paper worth (of TheStreet.com stock alone) was in the dozens upon dozens of millions of dollars. However, Cramer, being a savvy Wall Street vet, knew the stock was way overpriced and would soon come down to earth, along with his personal wealth. Because this happened during the lock-up period, even if Cramer had wanted to sell he was legally forbidden to do so. When lock-ups expire, the previously restricted parties are permitted to sell their stock.

The point here is that waiting until insiders are free to sell their shares is not a bad strategy, because if they continue to hold stock once the lock-up period has expired, it may be an indication that the company has a bright and sustainable future. During the lock-up period, there is no way to tell whether insiders would in fact be happy to take the spot price of the stock or not.

Let the market take its course before you take the plunge. A good company is still going to be a good company, and a worthy investment, even after the lock-up period expires.

The Bottom Line

By no means are we suggesting that all IPOs should be avoided: some investors who have bought stock at the IPO price have been rewarded handsomely by the companies in question. Every month successful companies go public, but it is difficult to sift through the riffraff and find the investments with the most potential. Just keep in mind that when it comes to dealing with the IPO market, a skeptical and informed investor is likely to perform much better than one who is not.
 

This is what you need to know about IPO Grey Market Premium...

The grey market

or, the illegal premium market for initial public offerings (IPOs) was back after almost a decade.

After its death almost 10 years ago, the the grey market was reborn in August, 2004 with Tata Consultancy Services (TCS) Ltd issue.

It is a completely illegal market where stocks are traded even before allotments in the IPOs are made. In fact, the unofficial trading begins well before the scrip is listed.

The transaction in this market is normally between parties who know each other very well. They trade in scrips unofficially and settle accounts outside of the stock exchanges once the allotments by the companies are decided.

Normally, third parties are not part of such trading.

However, a third party is entertained only if he is introduced through a person known in the circuit.

Two parties agree to settle the trade at a price on the day of listing through the stock market mechanism and the difference is settled through cash, explained broking industry sources.

A robust secondary market has aided this trend and players in this segment are doing brisk business across centres. Ahmedabad is the most active grey market centre while Kolkata, Delhi and Mumbai are also some of the centres where grey market for IPOs is alive and kicking.

A dealer with a brokerage house said, The future of the grey market for the IPOs is linked with the robustness of the secondary market. Till the time the cash market is in the pink of health, this grey market will flourish and the moment a downturn is signalled in the cash market, the grey market downturn will be faster than that of the cash market. In such an event, the premium market will disappear altogether.

IPO grey market - Glossary

1. IPO  

IPO is an initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

2. IPO Grey Market

 A grey market (sometimes called a parallel market, but this can also mean other things; not to be confused with a blackmarket or a grey economy) is the trade of a commodity through distribution channels that are legal but unintended by the original manufacturer.

3. GMP

GMP is Grey market premium (or grey market price) is a premium amount in rupees at which IPO shares are being traded in Grey Market before they get listed in stock exchange. Grey market premium can be in positive or in negative based on demand and supply of the stock. Grey Market Premiums are also attached with words 'Buyer' or 'Seller'. They tell the price either at which buyers are willing to buy shares or the price at which sellers are willing to sell their IPO shares.

4. Kostak

Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually 'Kostak' value is defined as the premium of a maximum lot retail application in an IPO. Kostak price is important mostly before issue is close for subscription and final bidding status is available to the IPO investors. Very few IPOs applications are traded after final bidding status is available to the investors. 'Kostak' is especially for people who do not want to take risk with IPO allotment or listing gains.

5. Basis of IPO allotment

In August 2012 SEBI has made regressive changes in the allotment procedures. As per these changes, every retail applicant will get a certain number of shares, though it is subject to the availability. It clearly means that retail investors are now assured to get minimum number of shares at a decided ratio irrespective of the lots they have applied, subject to availability. However remaining shares will be allotted proportionately. Current procedure is quite encouraging for retail investors as now they have assurance of getting shares in IPO. As per this practice every investor has equal probability of getting shares in an IPO irrespective of the lots he applied in an oversubscribed issue. Even if he applied for minimum permissible lot he may get minimum number of stocks allotted to shareholders. In fact retail investors who apply for smaller lots may have a better chance of getting more number of shares than the investors who applies for maximum amount permissible.

6. Subject to Sauda

Subject to Sauda is a kind of deal in IPO Grey Market in India.

Unofficially, an investor can sell an IPO Application to a buyer at an agreed price (Kostak Rate) before IPO Shares are listed in the stock market.

In case of 'Subject to Sauda' deal, while selling IPO application in the grey market, buyer and seller agree that deal is only valid if the seller will get the allotment. If the seller doesn't get any shares in IPO process, the deal gets void.