What are the Benefits of IPO?

IPO or ‘Initial Public Offering’ is a process where a private company’s stocks are first made available to the general public for purchase. Companies issue IPOs to raise funds. The capital raised by companies can be used for various business needs, such as paying off debt, expanding capacity, funding new projects, diversifying products, and conducting merger and acquisition activities. 

The benefits of IPOs are not only limited to companies, they provide several benefits to investors as well. Investors get the opportunity to invest and become shareholders of a young and growing company. By investing in a company with robust business plans and prominent financial growth, investors can potentially create wealth in the long run. In this article, we will explore the benefits of buying shares in an IPO along with its risks and considerations.

 Key Highlights

• IPO is a process of offering shares of a privately held company to the general public.

• To hold an IPO, companies must comply with the requirements of the SEBI (Securities and Exchange Board of India).

• IPOs serve as a great opportunity for companies to raise capital.

• IPOs are beneficial for new investors as they provide affordable entry prices.

• An IPO is an excellent opportunity for wealth building for both companies and investors.

Benefits of Investing in IPOs

The benefits of investing in IPOs include:

• Listing Gains

Listing gains is one of the potential benefits of investing in an initial public offering or IPO. When a company opens at a price that surpasses the offer price, an investor gains from listing. The listing gain can be better understood as, when investors applied and received the shares of a particular company at an offer price, and due to high market demand the company opens at an increased price, and investors receive a significant profit.

• Improved Liquidity

Once the company is listed publicly, investors can start trading their stocks in the open market, thus providing them with improved liquidity. This means when a company’s stocks are public, investors can buy and sell shares at any time during trading hours. Thus, ensuring greater liquidity to investors.

• Buy Shares at Low-Price

When a company issues IPOs, it often offers its shares at low prices compared to the prices of what they might be worth during listing. Thus, by investing early, investors benefit themselves by obtaining shares at an inexpensive price, leading to profitable wealth creation in the long run, especially when the company experiences significant growth over time.

• Diversification

IPOs are an excellent opportunity for investors who are looking to diversify their portfolios and include a mix of various sectors and industries in their portfolios. Diversifying investments in different assets not only creates a balanced portfolio but also mitigates the share market risks, fluctuation, and losses.

• Equal Opportunities for Retail Investors

Securities and Exchange Board of India has implemented measures like relaxed norms to ensure retail investors get an equal chance of share allocations in IPO. As per SEBI guidelines, in case of oversubscription retail investors are assured to receive at least one share. If it is impractical for each retail investor to receive share allotment then a lottery system is used to provide a balance field.

• Shareholder Ownership Rights

If you apply and receive the allotment of shares during an IPO, you will be granted certain shareholder rights, including voting rights in companies AGMs (annual general meetings). Thus, providing a sense of ownership and influence in the company.

Risks and Considerations

IPOs offer several benefits and potential returns and are thus considered an excellent way of investing money. However, every investment strategy including IPOs comes with some amount of risk that every investor should consider before investing. 

• One of the major risks to consider is market volatility. Newly listed IPO shares might experience severe market fluctuations initially in stock prices. These fluctuations are often due to low demand of shares in the market, or dominant market conditions. Other reasons include early investors redeeming their investments which can lead to a significant drop in share market prices.
• Another cause influencing IPO investment is the lack of historical data. When investing in a company that has been publicly trading previously, you have historical data like growth potential, profitability, and other information. Thus, the lack of companies’ financial performance and sustainability makes the IPO investment riskier for investors.

Conclusion

Investing in IPOs opens opportunities to both companies and investors. Newly listed companies in public trading get the benefits of growth and expansion, whereas investors get the chance to purchase shares at discounted prices. When a company acquires significant financial growth, it helps investors to create wealth in the long run and achieve their financial growth. There are a range of benefits associated with investing in IPOs like listing gains, enhanced liquidity, diversification, shareholders ownership authorities, and much more. However, with great benefits, IPOs come with some risks as well. Investors must be aware of risks like market fluctuations and lack of historical data. By carefully considering both benefits and risks investors can make an informed decision that aligns with their financial plans.

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