What Are The Main Advantages And Disadvantages Of IPO?

An Initial Public Offer (IPO), also known as a stock market launch, is an offering of a private company’s shares to the general public. The initial stocks of the company are offered in the primary share market. The financial year 2022 has been enthusiastically floating with IPOs, with the launch of more than 15 mainboard IPOs, finding their place in the Indian stock market since April 2022. 

IPOs assist a company in raising funds for growth and expansion and other business activities. Additionally, they create an exit opportunity for founders and initial stakeholders of a business, who can liquify their capital tied up in the company by selling their shareholdings. A presence on the stock exchanges enhances the visibility of a business among prospective customers and investors. 

IPOs offer ample advantages to the company. However, as an individual investor, you need to understand the advantages and disadvantages of investing in an IPO for retail investors. Once you understand what is demat account, you can consider investing in an IPO.

Advantages of Investing in an IPO

Individuals interested in IPO investment can keep a check on the Qualified Institutional Buyer (QIB) IPO category. If an IPO has achieved complete or oversubscription in the QIB category, retail investors can consider it a reasonable investment option. QIBs can access a company’s details better than retail investors, therefore, their insights are usually reliable. 

  • IPOs open the doors for retail investors to a profitable business: IPOs allow the general public to buy the shares and become a part of a profitable business, which was otherwise closed to the public. IPO investors enter their positions during the early days. It is a smart way of withdrawing early benefits in a short time. If the share continues to do well in the secondary market, you can hold it for the long term. 
  • IPOs usually involve no cost of investment: Unlike standard stocks, where retail investors pay brokerage and other charges to the stockbroker, IPOs usually involve no cost of buying. It is because underwriters distribute IPOs, and do not charge the company for this service. You can apply for demat account online to manage your shareholdings. 
  • IPOs offer price transparency: Investors can find the complete IPO price valuation information in the publicly-available prospectus that the company files. Therefore, all categories of investors receive the same and fair information about the price valuation of an IPO. 
  • IPOs offer scope for exponential returns: The IPO price of a company’s shares you pay exposes you to the opportunity of making huge profits over time. If you invest in the right IPO, even a small investment can help you extract significant returns. 

Disadvantages of Investing in an IPO

Like any other investment option, IPO investment may have a flip side too. One needs to be aware of the possible disadvantages of investing in an IPO before investing.

  • IPO investment requires research: Before investing in an IPO, an investor needs to conduct a thorough research about the company and its future prospects. One must understand a business’s present financial standing and growth plans before investing in it. It can be a tedious and time-consuming process. Understanding a company’s balance sheets and the information offered in the prospectus is not every investor’s cup of tea. 
  • IPOs may be clouded with uncertainty: Selling the shares of successfully launched IPOs is easy. However, it may not be the same for IPOs that did not have a remarkable opening. One may be forced to hold these shares for long to create a scope of reasonable growth on them. 

IPO investing comes with its pros and cons. An investor can conduct reasonable research on a company before investing in its initial offerings to be sure of his investment.

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