A company will go public through the means of an IPO investment to raise money for growth, pay down debt, fund acquisitions, or reward early investors. What that means in simple terms is that when a company launches its IPO, it wants to tap into a very large pool of capital for their future growth.
So, why do investors invest in an IPO? The obvious reason is to profit either through long-term stock appreciation or through immediate listing gains. Simply put, listing gain is when a stock starts trading on the very first day at or above the issue price.
This blog by Moneyplantfx will discuss everything there is to know about IPO listing gains, how they are calculated, and what factors impact them.
Generally, when investors invest in an IPO, they expect to make a profit. “Listing gains” are the profits an investor realizes immediately after shares of a company’s IPO have been officially listed on the stock market.
Once shares are listed on the market, if demand is high and the price of those shares rises, in theory, that investor could sell them at a price above the issue price. The difference between the issue price and closing price is the listing gain expressed as a percentage.
An investor’s IPO investment can also result in a loss if shares list below the issue price of the IPO due to demand for the offering being weak or the overall market sentiment being poor.
Amit is new to investing in IPOs. He bids for 50 shares of the IPO of ABC Ltd., at ₹150 a share, making the total investment:
This example demonstrates how you can profit quickly on listing day by investing in an IPO. Nonetheless, if the stock had listed at a loss rather than a profit, Amit may have experienced a loss at the end of the day.
1. Supply and Demand
When there is high demand for an IPO investment and sought-after shares are scarce, you will often see huge spikes in share price. Alternatively, if the demand is low and the supply is plentiful, share prices could be deflated
2. Growth Potential of the Company
Investors seek out companies that have strong fundamentals and positive growing prospects. When there is a high degree of confidence in an IPO investment, it can attract more investors and result in inflation in listing prices
3. Grey Market Premium (GMP)
GMP is an unofficial marker of expectations for listing performance. If the issue price is ₹800 and its GMP is ₹100, then the expectation is that the stock will open listing at ₹900. However, while GMP is a factor in the decision to invest in an IPO, it is one of many, and the market and feelings towards market trends matter as well.
4. Market Conditions
Successful IPOs often benefit from a broadly bullish sentiment for markets. Even if you invest in a strong IPO, it can be challenging in a broadly bearish stock market.
Oversubscription occurs when the number of applications received exceeds the shares available for an IPO. It indicated that there is a high level of demand for an IPO investment to occur. It generally results in a higher listing price and higher volatility.
Oversubscription alone does not guarantee long-term success because there are many IPOs which drift lower post-listing due, especially to over valuation, lack of earnings, or lack of fundamentals. Thus, as an investor, you should consider oversubscription analysis as well as due diligence before making your decision to follow through with your investment into an IPO.
There are two ways in which you can derive a profit from your investment in an IPO:
Listing gains allow investors to make quick profits ahead of the first day close, but of course not every IPO investment will go smoothly and generate a return. A strong demand, or oversubscription for an IPO, can take the price up, however the price ultimately depends on long-term fundamentals, the financial position of the company and other factors at play in overall markets.
At Moneyplantfx, we believe it is not enough to take a short term approach and simply look for listing gains, we believe that investors should analyse the long-term growth prospects of their IPO investment. Having a balanced approach will happen whether there are risks or cleaner returns.