Are IPOs Worth Investing?

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Are IPOs Worth Investing?

Do you think there is one right answer to it?

Obviously, No! It really depends on the IPO, the business raising the IPO, its background, financial health, past performance, competition level, industry growth and a lot of other factors to add to it.

Investing in Initial Public Offers (IPO) of many companies have brought considerable changes in the financial condition of the investors. An interesting thing to note is that those financial conditions have changed both in positive and negative directions.

Good and Bad, right?

Are IPOs Worth Investing – Yes or No?

Before we give a black and white answer to the confusion that are IPOs worth investing or not, let us first remember some examples of IPOs that changed the lives of people for good. Infosys, HDFC Bank, Sun Pharma, TCS are some of the names of extremely good IPOs which brought lots of wealth to their investors.

Let’s understand the point – Are IPOs Worth Investing?

Whenever an IPO is launched, there is a lot of hype around it. Almost all the IPOs come with a lot of media coverage and lucrative promises. The first and foremost thing one should keep in mind before thinking about investing in IPOs is to ignore all the hype created and just start looking for signs that indicate the accurate picture of the company.

You must not get biased in any form with all this hype since a major chunk of this hype is paid advertising and thus, there is obviously a hidden bias in the background.

Let’s have a quick look at the other side of the coin as well. According to the data mentioned in The Economic Times, following IPOs have betrayed their investors badly:

Reliance Power: It came 91.84% down from its listing price

DLF Limited: It dropped 89% from its listing price  

HDIL Limited: It came 76.7% down from its listing price

According to Benjamin Graham, also known as the father of value investing, “IPO” stands for:

It is Probably Overpriced

Imaginary Profits Only

Insiders’ Private Opportunity

Now, let us discuss the above-mentioned points in detail:

It is Probably Overpriced and Insiders’ Private Opportunity:

It is a common assumption that IPO is the best way to buy shares at the lowest prices.

However, very few people know that even before anyone knew about the company, investors like angel investors, private equity firms, venture capitalists, etc. have already taken their shares at extremely low prices than what is being offered to the general public through an IPO.

IPO is a great way for all the early shareholders to cash out their investments at higher prices and earn many fold returns on their investments. This is the reason why this overpricing occurs.

Now, let us see why Benjamin Graham calls IPOs as Imaginary Profits Only:

With every IPO, the hype surrounding it wants to make us believe that is a “once in a lifetime opportunity”, “life-changing opportunity”, etc. But we need to get past this frenzy and think for ourselves. If we look at long-term perspective, most IPOs underperform in comparison to their counterparts in the same sector and market as a whole.

For Example: According to the data on BSE’s website, as of July 2017, BSE-IPO index was launched in 2004. Ever since the performance of BSE-IPO index has been lower in comparison with both BSE-30 and BSE-200 indices.

However, there are some good points in favour of investing in IPOs like:

Some excellent options for Investment:

IPOs have given options to investors for investing in some very good companies like D-Mart, SBI Life, Dr Lal Pathlabs, etc. In the last 15 years, divestment from some good PSUs like Maruti Suzuki has been extremely beneficial for investors who invested in its IPO.

After listing, the prices of outperformer companies have touched prices very high in comparison to where they started from. To invest them at the IPO stage had been the best financial decision for their investors.

The Benefit of Equality of Information:

Unlike the secondary markets, everyone including institutional investors, analysts and small retail investors have the same information available to them about the IPO being launched. That information is in the form of a prospectus. It is a lengthy document which needs to be filed at the time of an IPO launch mentioning all the details about the company that you need to know.

It is a must to read it carefully before making the decision of investing in an IPO. Whether to invest in an IPO or not, whether it would be worth your investment or not, these questions must be answered by you and only you because no one else can make a better decision about yourself.

Hopefully, we were able to solve your queries or confusions around are IPOs worth investing. Feel free to let us know your thoughts in the comments section below:

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