It’s raining IPOs. The full form of IPO in the share market is Initial Public Offering. Imagine a new product or service launched in the market, you will buy it only if you know more about it through advertisements or word of mouth. You will also consider other factors like brand, benefits & cost before betting on it. Similarly, IPOs are brand new offers of shares listed out for investors to buy in regulated & organized markets. IPO Grey market is an unofficial market where IPO shares are traded even before they are out for a subscription to the investors.
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What is an IPO (Initial Public offering)?
Initial public offer means when an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s securities in the Stock Exchanges.
What is IPO Grey Market (GM)?
IPO GM means Initial Public Offering in Grey market or IPO Grey Market. Before the securities are issued to the public, trading of these takes place by traders who are usually insiders in the non-regulated unofficial markets. This helps others to know how much interest does the stock generates, if it is trading at a premium, it means that it is a hot cake, the most wanted one. However, this in no way guarantees listing gains on stock or very high profits. Since this is an unofficial market, sometimes the high premium for the stock in the IPO grey market is faked through a robust roadshow whereas ultimately it might get listed at huge losses on stock exchanges. A grey market IPO usually involves CFDs (contracts for differences). These are derivative financial instruments that estimate returns based on how close the forecasted outcome was when compared to the actual outcome.
What is IPO Grey Market Premium or IPO GMP?
GMP (grey market premium) in the IPO Grey Market refers to the high price that the security is trading even before it is offered to the public. The price at which it is trading in the IPO grey market might be higher than the price offered on the allotment to the public. The difference between the offer or issue price and the trading price in the IPO grey market is called the grey market premium.
Example- Shares of ABL Ltd will be issued to the public tomorrow at a price of Rs 500/- per share, today in the IPO Grey Market the same share is being traded for Rs 650/- per share. Thus the Grey Market premium today is Rs 150/- per share. This share will get traded in the IPO Grey market unofficially till the last day of allotment. Grey Market Premium gives an idea to investors if there is enough demand for this share in the market or not. If there is no Grey Market premium then it means that there is no demand for this share. This does not necessarily guarantee listing gains to any investor if the GMP remains high throughout, nor does it mean that the shares will be listed at losses if there is no GMP at all. GMP is just an indication to the investor about the demand and supply. The real test of the stock begins once it hits the listed market.
When to Subscribe to an IPO and when not to?
As an investor you need to understand if the IPO offered at a particular price is worth investing in or not. A lot of factors will be taken into consideration while determining the real worth of the stock. However, major ones are listed below:
- Understand the business model of the company
- Analyze the financials of the company
- Review historical trend
- Review ratios
- Review debt
- Review cash flow from operations
- Understand the strengths & challenges for this company
- Understand the sector growth
- Identify the forecasted growth of the company as well as the sector to which it belongs to
- Compare with the competitors
- Understand whether it is priced accurately when compared to its peers
- Know for what purpose will the proceeds of IPO be used for
- Review the quality of management
- Find out if Government is providing initiatives that could provide long term benefits to the company
- Lastly, also review the impact of covid on the business
After analyzing and understanding the above parameters you are in a good position to make a strong decision of betting on any IPO.
How to apply for IPO?
Applying for IPO is very easy. You need to have a Demat account to apply for an IPO. Once you have opened a Demat account then you need to ensure you have the minimum amount for an IPO lot size in your bank account. Usually, it is Rs 15000/- however in some cases, it might differ. Then you may bid for the IPO through an online Demat account. Once applied for IPO, the amount will get blocked in your bank account unless allotment is finalized. If you get the allotment of shares the same amount will get deducted from your bank account.
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How to increase your chances of getting an IPO allotment?
If you think the IPO is worth investing in, then to increase your chances of getting the IPO, apply through Demat accounts of all your family members. Remember one Demat account linked with one Pan ID is applicable for applying to only one IPO. Even if you have 2 Demat accounts, that does not make you are eligible to apply twice for an IPO. This will result in the rejection of your application.
How to become rich by investing in IPOs or through IPO Grey Market?
Once you have decided to invest in a good IPO, go for it. If you are lucky to get an allotment then wait for it to list on stock exchanges. If the listing gains are impressive like more than 50%, you may sell it off and make huge profits if you are a listing trader. With more than 50% gain on listing you may easily end up making Rs 7500 profit on an investment of Rs 15000. If you constantly pick up good IPOs, you are sure to mint huge money with the right exit strategy. Besides IPO Grey Market as discussed is only an indication of how much demand exists for IPO, though it does not guarantee any listing gains. Do take a note of IPO GMP for an IPO before it is open for subscription, but you may rely only 25% on it rest go by fundamental analysis and above factors.
Holding IPO shares for Short term or Long Term?
When you decide to bet on an IPO, it is after you have thoroughly analyzed it, sliced it & diced it. If you get listing gains like 20% or less than 50%, you may sell it off. However, if the listing gains were more than 50% considering a non-bullish day, then hold on to that share, as the demand triggers a strong buy signal in the coming future. Again everything depends on how much you trust the business model of the company along with the products and services offered by it. If you forecast huge growth then stick to it else wash off your hands
This is how the IPO market works. If you learn the skill of choosing quality IPOs, you will end up building huge wealth in the long run and achieve financial freedom.
In US Market there were 365 IPOs in the first quarter, IPO activity surged by 677% when compared to last year.
Let us know your thoughts on Choosing an IPO?
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