How IPOs can be a smart investment strategy to amass wealth

True, not every IPO strikes gold, but it’s not uncommon for a stock to double just months after going public.

You should not get lured into an IPO frenzy. You've to do your due diligence, understand the factors and study Research reports and Fundamental analyses.

Unless you were hiding in a cave with no internet, you’d already know that 2021 was the year of IPOs. Over 51 IPOs hit the Indian market by October, raising a total of Rs 90,000 crore.

And for the investor who knows how to pick the winning IPOs, it has been a dream come true to amass wealth both in the short and long term. Well, not every IPO strikes gold; some have been dud because the company failed to perform as expected.

But it’s not uncommon for a stock to double just months after going public.

Let me unpack this a bit and show you the 4 unique benefits of investing in the IPOs.

1: Early-bird Investor advantage

With an IPO, you invest at the time the company transitions from private to public. This means you are investing in the hottest stocks of the company, especially when they’re moving up the fastest with a massive potential to grow and expand. And suppose the company you invested in offers cutting edge, breakthrough solutions, and it explodes out of the gate and sustains the growth. You gain massive profit windfall. Some IPOs are worth their diamond for the right time investors. For instance, Amazon.com Inc. floated an IPO in 1997 and priced each share at $18. So if you had invested $5,000 in Amazon’s IPO, you know how much it’s worth today in December 2021.

2: Discounted Investment. Fat profits

Many companies offer their shares at the lowest price when they float their IPOs. And it’s because they may be small, fast-growing, under-the-radar companies. But as the company grows and news breaks, the share price may skyrocket. And you miss out on the only chance to buy its stock at a much lesser price than its true value. Look at Paras Defence And Space Technologies Limited. The company went public on Oct 1st, 2021, and the issue price was Rs 175. The current price at NSE is Rs 735.45. Which means it spiked 320% in just a month.

3: More information to make a better decision

When a company floats an IPO, it has to provide a detailed prospectus with information like its past performance, assets, liabilities, financial status, risks, growth, and future plans. Moreover, the company has to clearly mention the price per security in the IPO order document ensuring total transparency. So you as a retail investor also get the same details as the big investors. This allows you to make smart, savvy decisions.

4: Massive momentum. Exponential Growth

Companies that float IPOs attract big investors, a large volume of investors and huge media exposure and PR. Thus gain massive momentum making these red stocks even hotter. And since there’s no past stock history and stock chart, it is a clean field for investors to play. This is why you often see IPOs have exponential growth than ordinary stocks.

Today, India has become a global hotspot for IPOs. Consider this: Route Mobile Ltd floated an IPO on Sep 21st, 2020, with a listing price of 350, and it has jumped to 400.37% as of today at NSE.

This means you could have tripled your money on Route Mobile Ltd by simply buying its stock the day of its listing. Consider this: Happiest Minds Technologies Ltd, since its listing on Sep 17th, 2020, has churned out an annualized profit of 616.17%.

You could have made a fortune if you had targeted Happiest Minds Technology.

How to harness the wealth-building power of IPOs?

Time matters. You don’t want to miss out on a private company you were interested in that goes public and becomes a sure winner. You should access the potential of so many under-the-radar and undervalued companies that go public. You should not get lured into an IPO frenzy. You’ve to do your due diligence, understand the factors and study Research reports and Fundamental analyses. The prospectus doesn’t disclose everything. You should seek experts’ help. There are patterns that show, with excellent predictability, the performance of an IPO. An expert can guide you on where to invest; when to invest; how much to invest; when to exit; when to sell out certain stocks to lock in profits and how much to keep invested for the long term.

(By Videsh K Totaare, MD & CEO, Archers Wealth Management Pvt Ltd)

Disclaimer: These are the personal views of the author. Readers are advised to consult their financial planner before making any investment

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