In the first half of 2024, a record number of companies entered the IPO market.
A recent study by SEBI (Securities and Exchange Board of India) revealed that many investors are participating in IPOs primarily for quick gains.
According to the study, 54% of investors sell their shares within a week of allotment, and 74% sell within a year.
This indicates that the primary motivation behind IPO investments is listing gains. However, this trend may change if market conditions worsen and investors face prolonged losses.
Continued Growth in IPO Market for 2024
Consultancy and audit firm EY reported that 2024 saw a strong IPO market in the first half, with Indian companies accounting for 27% of global IPOs and raising 9% more capital compared to other regions.
This momentum is expected to continue into the second quarter of 2024, with several large IPOs on the horizon.
Profits in IPOs Driven by Stock Market Boom
The current market boom has made IPOs a profitable avenue for investors. However, the stock market’s upward trend is not guaranteed to last.
During 2022-23, some investors experienced losses from investing in IPOs, especially in newer companies.
Data from global markets supports this, with studies indicating that IPO returns often underperform in the long run.
For example, research by Professor JR Ritter from the University of Florida shows that between 1980-2022, IPO returns in the U.S. were negative over a three-year period.
Most IPOs tend to occur during a bull market when companies are performing at their peak.
Exercise Caution When Investing in IPOs
Experts advise caution when investing in IPOs. For instance, the founder of Quantum compares IPOs to beauty contests, where investment bankers aim to secure the highest offer for companies, often compromising investor interests.
Quantum typically avoids IPOs due to the volatility in trading volumes in the initial days after listing. The firm prefers to wait until the stock’s liquidity stabilizes before considering investment.
The Key to Wise IPO Investments
While IPOs are an essential tool for companies to raise capital, investors need to be selective.
Though many successful companies offer promising opportunities through IPOs, historical data shows that more investors profit from IPOs than lose money.
To make informed decisions, investors should carefully assess the company’s management quality and the fair value of the stock before investing.
