The Exciting World of IPOs: Balancing Risk & Reward.
Updated: May 3
IPOs are the new trending investment method where all individuals are interested to investment in IPO so that they can make quick gains. However, before investing in any IPOs we must understand IPO in detail & its risk -rewards for such investment.
IPOs offer an opportunity for private companies to raise money by offering shares of their stock to the public, allowing investors to get in on the ground floor of a promising company before it becomes widely known.
An Initial Public Offering (IPO) is the process by which a private company becomes a publicly traded company by offering its shares for sale to the public on a stock exchange. Essentially, an IPO is the first time that a company's shares become available to be bought and sold by the general public. Whenever IPO has been issued, the company goes to Primary market to issue fresh shares for the first time from company to investors.. Company going for second issue of shares are called FPO which is Follow on public offer.
Prior to an IPO, a company is privately held, meaning that its shares are held by a small group of investors, typically including the company's founders, early employees, and venture capital or private equity investors. Going public through an IPO allows the company to raise additional capital by selling shares to a wider range of investors, including institutional investors such as mutual funds, hedge funds, and pension funds, as well as individual retail investors.
To carry out an IPO, a company typically hires investment banks to act as underwriters and help prepare the necessary documentation, including the prospectus, which contains information about the company's business, financials, risks, and management team. The investment banks also help determine the price at which the shares will be sold to the public, and may help market the IPO to potential investors.
Once the shares are offered for sale to the public, they can be bought and sold on a stock exchange, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). The price of the shares is determined by supply and demand, and can fluctuate based on a variety of factors, including the company's financial performance, market conditions, and investor sentiment.
The shares are placed either through Book building method or Fixed Price method.
In Book building method, the company and its underwriters determine a price range within which they expect to sell the shares. Potential investors then bid on the shares within that range, indicating the number of shares they are willing to buy at various prices within the range. The book building process typically lasts for a few days, during which the underwriters and company monitor the demand for the shares and adjust the price range accordingly. At the end of the process, the final price of the shares is set based on the highest price at which the company can sell all of the shares being offered to the public. The book building method is used to ensure that the IPO is priced correctly and that the shares are sold at a fair market value. It allows the market to determine the value of the shares based on supply and demand, rather than relying solely on the company's own valuation or the underwriters' assessment of the company's value.
Overall, the book building method is a widely used mechanism in IPOs and provides a fair and transparent process for pricing and allocating shares to investors.
Secondly, in Fixed Price Method, the company and its underwriters determine a fixed price at which the shares will be sold to the public, regardless of the demand for the shares.
The fixed price is usually determined based on a variety of factors, including the company's financial performance, market conditions, and the price at which comparable companies are trading. Unlike the book building method, the fixed price method doesn't allow for the price to be adjusted based on the demand for the shares. This means that if the demand for the shares is higher than expected, investors may miss out on the opportunity to buy shares at a lower price.
However, as with any investment, there are risks involved. In this blog post, we will explore the risks and rewards of investing in IPOs in more detail.
Understanding the Risks of Investing in IPOs
1. High levels of volatility. :
One of the most significant risks of investing in IPOs is the high level of volatility that can occur in the market. The value of an IPO is often driven by hype and speculation, which can lead to significant fluctuations in the stock price in the weeks and months following the initial offering. This volatility is often driven by the fact that the market has not yet fully assessed the company’s potential value. This means that prices can move in unexpected ways, even in response to minor news events.
2. Lack of Historical Data :
Another challenge associated with investing in IPOs is the lack of historical data available for the company. Established public companies have years of financial data and a track record of performance that investors can use to assess the company's financial health and prospects for growth. However, IPOs have little to no history to draw on, making it difficult for investors to assess the company's potential. This lack of historical data can make it challenging to evaluate whether an IPO is a good investment.
3. Overvaluation :
Another risk associated with investing in IPOs is the possibility of overvaluation. In the run-up to an IPO, there is often a lot of hype and excitement surrounding the company, which can drive up the price of the stock. However, this can result in an overvalued company, where the stock price does not accurately reflect the company's true value. If the market later realizes this and the stock price drops, investors who bought in at the inflated price could see significant losses.
4. Insider Selling :
When a company goes public, its insiders, including executives and early investors, are typically subject to a lock-up period, during which they are prohibited from selling their shares. However, once the lock-up period expires, these insiders are free to sell their shares on the open market, potentially flooding the market with additional shares and driving down the stock price. This can cause significant volatility in the market and make it difficult for investors to predict the stock's performance.
5. Fluctuations in the Stock Price :
Finally, it's worth noting that IPOs can be subject to significant fluctuations in the stock price, even beyond the initial period of volatility. This can be due to a variety of factors, including changing market conditions, changes in the company's management team or business strategy, or unexpected challenges or opportunities that arise. Investors in IPOs must be prepared for these fluctuations and have a plan in place for how to respond if the stock price does not perform as expected.
Below mentioned are the Rewards for IPO:
1. Potential for High Returns :
Despite the risks, investing in an IPO can offer the potential for significant returns. If an IPO is successful and the company goes on to perform well, investors who bought in early can see their investment grow rapidly. For example, investors in Hariom Pipe Industries IPO made 209% gain in the listing day itself in the year 2022.
2. Access to Innovative Companies : Investing in IPOs can provide investors with access to innovative and emerging companies that have the potential to disrupt established industries. These companies often have innovative business models, cutting-edge technology, or a unique approach to solving a problem that
3. Liquidity :
IPOs offer investors the ability to buy and sell shares in a company that is publicly traded, which can provide liquidity for their investment.
4. Diversification :
Investing in an IPO can help to diversify an investor's portfolio, providing exposure to a new sector or industry.
5. Potential for long-term growth :
IPOs may provide investors with the opportunity to invest in companies that are expected to grow over the long term, potentially leading to sustained returns over time.
Below are a few IPOs that are scheduled to take place in the near future:
1. PattechFitwell Tube Components Limited
It was incorporated in 2022, Pattech Fitwell Tube Components Limitedcommenced its journey a decade ago in the year 2012. The company is engaged in the manufacturing of forging products for the non-automotive sector.Pattech Fitwell has a total installed capacity of 14104.13 MTPA for manufacturing forged flanges, complex and specialized machined components, welded assemblies in the area of open die forgings. They convert semifinished/raw products to finished products by carrying out various value-added processes like forming, bending, drilling, cutting, inspection, polishing, painting, blasting, welding, punching, marking, testing, and packaging.
Below mentioned are details of Pattech IPO:
2. Avalon Technologies Limited IPO :
It was incorporated in 1999, Avalon Technologies Limited is a leading fully integrated Electronic Manufacturing Services ("EMS") company. They have end-to-end capabilities in delivering box-build solutions in India, focusing on high-value precision engineered products. The company is one of the leaders in the segment in India in terms of revenue in Fiscal 2022.
The offerings of Avalon Technologies Limited include PCB design and assembly, cable assembly and wire harnesses, sheet metal fabrication and machining, magnetics, injection molded plastics, and end-to-end box build of electronic systems.