Why Should You Invest in an IPO?

23 February 2024
4 min read
Why Should You Invest in an IPO?
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IPO stands for "Initial Public Offering." It is the first time a company's stock becomes available for public purchase. In an IPO, a privately held company issues new stock to raise public investors' capital.

IPOs can provide companies with a large influx of money that can be used to fund new projects, pay off debt, or provide a return on investment to early shareholders.

At the same time, IPOs offer investors the opportunity to buy stock in a young, growing company and potentially benefit from its future success.

Why Do Companies Offer IPOs?

Companies raise funds from the capital markets via an IPO issue. The capital raised could be channelized for diverse business needs like capacity expansion, product diversification, entry into a new geography, a significant R&D initiative, merger and acquisition activity, etc. The disclosure of the proposed usage of the funds is to be mentioned in the issue prospectus.

The advantage for a company to raise funds via an IPO over other traditional financing channels like loans is the visibility in public and the opportunity to improve market capitalization.

The layman gets an opportunity to buy shares and holds a small stake in company ownership. Thus from the valuation perspective, it makes sense for companies to opt for the listing route.

Companies desirous of getting listed on the stock exchanges like BSE and NSE in India need to issue shares to the public for subscription via an IPO process.

📣 IPOs to look out for
Companies
Type
Bidding Dates
SMECloses 18 Jul
SMECloses 19 Jul
SMECloses 19 Jul
RegularCloses 23 Jul
Regular-

Why Should an Investor Consider Buying IPO Shares?

In an IPO issue, investors can buy shares of the issuing company by investing money and becoming shareholders.

Depending on their shareholding, shareholders are entitled to dividends, bonus shares, etc., based on the company's earnings and declaration by the management of dividends or bonus issues. Historically, equity has generated higher returns than other asset classes.

Thus, it is prudent for investors to hold a particular portion of equity in their portfolio. However, equity is also considered risky as the share prices are prone to frequent fluctuation based on economic and non-economic events and often, without any particular reason.

In the long run, however, investing in the share market can help in wealth creation by investing in valuable stocks of reputed companies with a robust business model and financial performance.

An IPO is an opportunity to pick winning stocks and support at a competitive price in the shares of future industry leaders that provide valuable earnings by way of stock appreciation.

Due to the reasonable price, one can buy multiple shares of the issuer company at an affordable price. However, after the company has already established itself, it would be costly to purchase various stocks of the company as the current market price would be high.

Reasons To Invest in an IPO

Here are some reasons why you should consider investing in an Initial Public Offering in India-

  • Early Entry

It allows individuals to get in on the ground floor of a company and benefit from its growth potential.

  • Diversification

It can help to diversify a person's portfolio, reducing risk and improving overall returns.

  • Potential for High Returns

IPOs have the potential to generate high returns, especially in rapidly growing industries such as technology and healthcare.

  • Liquidity

It can provide liquidity, allowing individuals to sell their shares quickly and easily if they need to.

  • Long-term Growth

It can provide long-term growth potential, especially if the company is well-positioned in a growing industry.

  • Good Valuations

IPOs in India are usually priced at a discount to their market value, providing good value for money for investors.

  • Increased Awareness

It can increase awareness about a company and its products or services, leading to increased demand and higher stock prices in the future.

  • Tax Advantages

An IPO may offer tax advantages, as long-term capital gains are taxed at a lower rate than short-term gains.

Conclusion

Opting for an IPO is an excellent way to benefit from the growth of the country's economy and the potential of new companies entering the market.

IPOs offer an opportunity to invest in a company at its early stages and potentially see significant returns in the future.

With a rapidly growing economy and an increasing number of IPOs, India provides a lucrative investment opportunity for domestic and international investors. However, it is essential to conduct thorough research, assess the risks involved, and seek professional advice before making any investment decisions.

With the right approach, investing in IPOs in India can be a valuable addition to any investment portfolio.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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