Should you invest in an IPO for listing gains?

When planning to launch their initial public offerings (IPOs), companies usually hope to raise fresh capital. The funds could be put to use for any number of things- research and development, business expansion, implementing new plans, or even to clear/cut existing debt. A private company goes public through an IPO, i.e., the stocks of the company are available for trade in the primary markets. The shares of the company also get listed on the exchanges and are available for sale and purchase in the markets.

But when we look at an IPO from the investors' lens, the question that arises is 'what is in it for us'? Amid the ongoing IPO fever, people are increasingly looking to try and make quick and appealing returns by putting their money in the shares of a company going public. The idea here is to make listing gains through the purchase and sale of shares in a public issue.

Now, what exactly are Listing Gains?

A part of the IPO process is the allotment of shares to applicants. Companies value their shares with the help of a merchant banker after taking into account a range of factors, which are then disclosed in the offer document. They then come up with an issue price or a price band for the subscription. Investors can bid for the shares and thus apply to the IPO. Once the subscription period ends, shares are allotted to investors in line with the pre-determined guidelines by the Securities and Exchange Board of India (SEBI). Once the share allotment is complete, the issuer (company) has to fulfill necessary formalities within a stipulated period (a week to 12 days) before its shares debut on the bourses. The IPO listing is complete when the company's shares finally hit the exchanges and are available for trading thereafter.

There are two possible scenarios that could emerge now. Either the shares of the company open or start getting traded at a price higher than the allotment price, or they trade lower than it. The difference between the opening price of the stock and the allotment price in the former scenario (where listing price is higher than allotment price), is called the listing gain.

Many traders drift towards an IPO because of the appeal of listing gains. However, there is no guarantee that a stock will always open at a gain. This is completely dependent on the market sentiment, demand for the IPO, global factors and short-term outlook, among other things. Many investors go ahead and invest in an IPO that may not necessarily make listing gains because they are more focused on the company's long-term growth prospects.

Is there any link between IPO oversubscription and listing gains?

Again, an important point to note is there is nothing to prove any established link between an IPO oversubscription and listing gains. Oversubscription to an IPO may be seen as a reflection of positive demand for the company's shares. However, an oversubscribed IPO does not necessarily mean confirmed listing gains on the stocks.

The reasons behind investing in an IPO may vary from investor to investor. While some may be eyeing short-term, attractive returns via possible listing gains, other may be in it for the long haul. The strategy of investment also depends on the financial goals and risk appetite of a person.

Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. Please note, I-Sec is acting as a distributor to offer IPO distribution related services and distribution of IPOs are not Exchange traded products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.