How to decide when to buy an IPO for the best returns in India?

IPO investing offers the potential for high returns and the thrill of early-stage investment. Imagine getting in on Apple before it became a household name. However, not all Initial Public Offerings (IPOs) perform well in the long run, making it essential to evaluate the right time to invest. If you’re wondering when to buy an IPO for the best returns in the market, you’ve come to the right place.

Breaking down the IPO process

Before you decide to invest, it’s important to understand how the Indian IPO market works. Companies go public to raise capital, and their shares are offered to the public for the first time. The price of these shares can fluctuate significantly after listing, making timing crucial for maximising your gains.

Important factors to analyse before buying an IPO

1. Analyse the company’s financials

Before you invest, study the company’s financial statements, revenue growth, and profitability. A strong financial background indicates stability and potential for future growth. The Securities and Exchange Board of India (SEBI) requires companies to disclose financials in their prospectus.

2. Check the industry performance

The industry’s performance in which the company operates plays a crucial role. A booming sector may support long-term gains, whereas a struggling industry might pose risks. For example, the Indian fintech sector has grown significantly, making IPOs in this space attractive.

3. Evaluate market conditions

Stock market trends impact IPO performances. If the market is bullish, IPOs tend to perform better. On the other hand, in a bearish market, IPOs may struggle to gain traction. In 2021, Indian IPOs collectively raised over ₹1.19 lakh crore, benefiting from a strong market sentiment.

4. Look at the Grey Market Premium (GMP)

The Grey Market Premium (GMP) indicates investor sentiment before the IPO listing. A high GMP suggests strong demand, while a low or negative GMP could indicate weak interest. However, GMP is unofficial and should not be the sole deciding factor.

5. Study the company’s valuation

Compare the company’s valuation with its competitors. An overvalued IPO might struggle to sustain its price post-listing, whereas a fairly valued or undervalued IPO has better growth potential. Analysts often use the Price-to-Earnings (P/E) ratio to determine if the IPO pricing is justified.

When should you buy an IPO?

1. Investing at the issue price

Many investors prefer to buy an IPO at the issue price during the subscription period. This strategy could be profitable if the company has strong fundamentals and good demand.

2. Waiting for the listing day

Some investors wait until the IPO is listed on the stock exchange to observe its initial price movement. It could be a good time to enter if the stock opens at a higher price than the issue price and maintains stability.

3. Buying after initial volatility

IPOs often experience price fluctuations in the first few days of trading. It might be a favourable time to invest if the stock stabilises after an initial dip and shows signs of strength. This approach helps investors avoid the initial hype-driven surge and enter at a more stable price point. 

Additionally, technical indicators like trading volume and moving averages can offer further insights into price trends. By analysing post-listing performance and market sentiment, investors can make a more informed decision about the stock’s growth potential.

4. Considering lock-in period expiry

Many IPOs have a lock-in period for institutional investors. Once this period ends, some investors may exit, affecting the stock price. Observing price movements post-lock-in can help determine a good entry point. Additionally, retail investors can benefit from understanding how institutional holdings impact stock stability.

If institutional investors continue holding shares post lock-in, it signals confidence in the company’s long-term prospects. A considerable sell-off may suggest that an asset is overvalued, presenting a chance to purchase at a reduced price after the selling pressure diminishes.

Common mistakes to avoid when buying an IPO

1. Investing based on hype

Many IPOs are marketed aggressively, creating a buzz in the market. However, hype doesn’t guarantee long-term success. Always research before investing.

2. Ignoring fundamentals

Some investors focus only on short-term gains and overlook fundamentals. A strong business model and financial health are key indicators of long-term success.

3. Not having an exit strategy

A well-planned exit strategy helps maximise profits and minimise losses. Before entering the market, set clear investment goals.

How to use a trading website for IPO investments in India?

A reliable trading website simplifies the IPO application process and provides real-time updates on stock performance. Ensure that the platform you choose offers research reports, market insights, and seamless transactions. 

Deciding when to buy an IPO requires careful analysis and market observation. By understanding key financial indicators, market conditions, and industry trends, you can increase your chances of making profitable investments. If you are looking for expert insights and seamless trading, Ventura’s platform offers valuable resources to help you make informed investment decisions.

Sources:

https://www.sebi.gov.in/sebi_data/commondocs/mar-2020/Annexure%20PO_p.pdf?

https://bfsi.economictimes.indiatimes.com/news/fintech/fintechs-ipo-release-surge-by-4x-in-fy24-report/117197412?

https://www.business-standard.com/markets/news/ipo-performance-2024-91-public-offerings-raise-rs-1-59-trillion-this-year-124122600434_1.html?

https://www.moneycontrol.com/news/business/ipo/hyundai-india-ipo-opens-tomorrow-should-you-subscribe-to-indias-biggest-issue-check-latest-gmp-12841344.html?

https://www.sebi.gov.in/sebi_data/commondocs/mar-2020/Annexure%20PO_p.pdf?