As the name suggests, an IPO, or an Initial Public Offering, can be considered to be a company’s debut on the stock market as a publicly traded company, changing from being a privately held entity. The company that is issuing the IPO raises the capital in the primary market, and after the completion of the IPO, all investors can trade its shares, which is then referred to as the secondary market. 

While from the perspective of an investor, an IPO presents an opportunity to attain shares of a company that showcases the potential to grow, to the company, it is an opportunity to raise capital from the public market and use the funds for purposes that will help them achieve their ambitions of growth.

Why does a company launch an IPO?

While it may seem to be a simple process to bring a company into the public market, the process is long and involves a lot of steps that need to be completed. Starting from making the choice of an investment bank to ensuring the regulatory filings, there are several stages before a business can offer the shares of their company to the public.

This may raise a question about why companies should trade their companies publicly, and dilute their shares. To answer this question, it is important to understand the following advantages of going public.

Increased Capital: By publicly trading their company, a business has the opportunity to raise a higher capital than they could have been able to as a privately held company. The other methods of raising capital, in the form of loans, are riskier and more expensive than launching an IPO. Furthermore, a loan limits the capital raised, while an IPO allows the company to raise capital from the public market.

Publicity gain: Offering an IPO allows a company to gain publicity by being listed on the stock exchange. This results in the company becoming more recognisable to the public, increasing consumer trust in the brand, its products and services. This increase in publicity also facilitates smoother acquisitions and mergers along with higher cash flow due to the publicly listed shares.

Credibility Formation: A result of being a publicly listed company after an IPO causes the company to have an increased visibility, which also increases the credibility of the company.

Assessment of Valuation: After a company is listed in the stock exchange, the valuation of the organisation is bsaically equal to the amount that investors are willing to pay for it. This allows investors to know and understand the valuation of the company. A proper valuation assessment also makes it easier to carry out mergers and acquisitions when needed.

What kind of companies are launching IPOs?

In the current scenario, a lot of companies, including new-age consumer tech companies and startups are pursuing an IPO. The year 2021 proved to be a record year for IPOs, witnessing investments worth over Rs 1.3 lakh crore across 65 IPOs. This record amount was more than four times the entire amount that was raised in 2020 by IPOs, which amounted to Rs 26,628 crore.

With the Indian IPO ecosystem growing at a rapid pace, it is expected that 2022 will also bear witness to a very active IPO market. For you as an investor, it is expected to be one of the best seasons to take part in the IPO boom, and secure your future.

While investors will see increased chances of investing in the market, it should be noted that in 2021, a lot of companies experienced a downturn after launching their IPO, which has resulted in investors becoming much more cognisant of current market situations. Companies likely to have an IPO in 2022 include the likes of the highly anticipated LIC, along with companies like Pharmeasy, MobiKwik and Ixigo. 

In 2021, new age digital firms like Zomato and Nykaa succeeded in gaining the highest amounts in fresh capital. However, PayTM, which raised Rs.18,300 crores through their IPO, surpassing Coal India in the amount of capital raised, saw a decline in their share prices.

Should you invest in an IPO directly?

Many investors buy the shares of an IPO with the intent of associating themselves with a company and earning long term gains for themselves in the process. However, there are also investors who invest in IPOs with the specific purpose of listing short-term gains. Depending on the demand of a company’s shares, the listing price (the price that you actually see for a stock on the stock market) of a company can be either higher or lower than the offer price. If the demand for a company’s shares is high, the listing price becomes higher than the offer price, and you stand to make significant returns on your investment. However, according to financial experts, when it comes to well-managed companies, it is usually advisable to stay invested for the long term after investing in their IPO to give yourself the best chance of maximising your returns.

Many investors are not fulfilling their maximum potential gains by exiting their investments too quickly after listing. In such cases, a thematic fund, or an equity mutual fund serves you well because they hold investments for a longer time after listing. With the IPO frenzy currently going on, it is also possible that many investors do not get shares allotted to them in the IPO. In such cases, you can also choose to take the mutual fund route to an IPO. However, it is always best to consult your financial advisor before you make an investment decision.