What is an IPO?
An IPO or an Initial Public Offering is the first time a private company issues its shares to the public by getting listed on the stock exchange. It is a way for the company to raise capital and funding from the public in exchange for shareholding.
When a company is planning to go public, they usually hire investment banks to analyse the demand and set a share price, choose the date, etc. IPOs are also a great way for initial promoters and owners to exit the company with gains.
Myth 1: All IPOs are high-risk, high-reward
Whether or not an IPO will be profitable for you will depend a lot on your research of the company, its financial standing and performance. A company that is known well by the public and has created a buzz around its IPO may not necessarily perform well. You will have to do thorough research before subscribing to the IPO.
Myth 2: The IPO company must be financially stable
Launching an IPO is decided upon by companies because they require funding. So this statement is not entirely true either.
There are broadly two reasons why a company decides to go public. It either needs funds to undergo expansion, a merger, or acquisition for growth. If this is the reason behind the IPO, the investors are set to make gains on their investments. This also shows that the company already has financial backing but needs additional capital for future growth.
The other reason why a company might be issuing an IPO is to repay debt. This is a sign of a financially unstable company. If they need to raise equity capital to repay debt, they will not be able to provide much gain to their investors.
Again, make sure to deep dive into the company and its financial position before investing.
Myth 3: The share price will always stay above the issue price
This is a huge myth! The share price is decided by the market forces of demand and supply. Although companies do fix the initial share price when it is first listed, market forces decide what it turns into. Many times, even with big companies, the share price has fallen drastically when the shares got listed. So, a high issue price does not affect where the share price will be after listing.
The issue price illusion has led many retail investors to lose significant sums of money. IPOs are usually launched during a bull run in the market. The positive market sentiments help bump up the issue price even further. By blindly investing based on the issue price, you may increase your chances of losing your money. Make sure you subscribe to an IPO because you deem it worthy of your money, time, and effort.