IPO vs Open Market – Which One Will You Choose?

An Initial Public Offering (IPO) is one of the most effective ways for a company to raise capital. It is the first time that external investors, both retail and institutional, get an opportunity to own a share in a privately held company. Once listed, the shares of the company can be bought from the open market.

In 2017, several IPOs have already hit the market, and many more are in the offing. However, investors are often not sure if they should subscribe to the IPO or wait for the company to start trading in the secondary market.

Both the approaches have their pros and cons. Here are a few aspects to consider:

  • Start Something New

IPOs are generally preceded by expert analysis, research, and trend analysis around the company and the sector. These comment on the long-term themes and possibilities around the investment idea. This presents a great opportunity for investors to expand their horizons, diversify their portfolio, and be part of sometime new.

While one can certainly buy these shares from the secondary market, the euphoria and marketing blitz around an IPO is something else!

  • Availability of Shares

Perhaps the key deterrent for investors vying for a pie of an IPO share is the disappointed associated with low (to nil) allocations when the scrip lists. Since investors are categorized based on their size (retail, institutional, etc.), and lots are drawn at random, it becomes a game of luck. The more lucrative and popular the IPO, higher the oversubscription, and lesser the chances of allocation. When you deal in the open market, you can save yourself this disappointment.

  • Flipping

Flipping refers to the common practice (generally for institutional investors) to sell a recently listed IPO stock within a first few days, to quickly book profits. This often floods the market with the stocks of the company, driving the prices below the list price. As easy as it might sound, it is not advisable for retail investors to engage in flipping. In fact, more often than not, the retail investors are caught on the receiving end of flipping.

  • Availability of Data

Analysing stocks is a tough job. It becomes even more so when you have limited amount of publicly available data for fundamental or technical analysis. This is what happens during IPOs. There is no historical information to bank on. The red herring prospectus is generally the only reliable and authentic source of data for an IPO.

Look closely at the company’s management team and the credentials of the underwriters. A strong team and large bankers is a sign of strength and stability. Portals like Edelweiss Partners carry the key information about IPOs that assists investors and advisors in taking informed decisions.

  • The Paperwork

Compared to the secondary market, IPOs generally demand more paperwork and fresh investments (which are locked in till the IPO is listed). This warrants additional paperwork, which often slows the process. Advisors associated with Edelweiss Partners benefit from services like back office support so that the paperwork is seamlessly managed on their behalf.

While IPOs have their benefits, not every idea is worthy of your time and money. Analyse closely, and pick wisely. Read more about Edelweiss Partners to learn about the benefits of partners and to track the current, forthcoming, and recently closed IPOs.

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