"IPOs: A Closer Look at the Highs and Lows of Investing"

Financial

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Mir Amir Sohel

7/3/20234 min read

Are you ready to explore the thrilling world of IPO investing? IPOs, or Initial Public Offerings, are like treasure hunts for investors, providing an opportunity to get in on the ground floor of a new company before the general public. It's a chance to potentially earn substantial profits if the company succeeds. However, before you dive in headfirst, it's crucial to understand the risks and challenges that come with investing in IPOs. Let's delve into some of these risks, including overvaluation, profit manipulation, low-quality companies, market volatility, and the expiration of lock-up periods, using examples from well-known companies.

1. Overvaluation: When the Hype Goes Too Far

Imagine a scenario where everyone is buzzing about a specific IPO, and the excitement is contagious. The demand for shares skyrockets, causing the company's stock price to soar. However, here's the catch: the stock might be overvalued. This means that the price doesn't accurately reflect the company's true value. Companies can get caught up in the hype, and investors who purchase shares at inflated prices may end up losing money in the long run. For example Paytm,Zomato,Nykaa, let's examine the IPO of Paytm, a popular Indian digital payments company. Its stock price initially surged to Rs.1781, but later faced a 70% drop in just 4 months, leaving many investors disappointed.

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2. Profit Manipulation: Tricks Behind the Scenes

Sometimes, companies attempt to present a better financial picture than their actual situation before going public. They may manipulate their profits, painting a rosier picture to attract investors. However, when the truth is revealed, it can have severe consequences. Consider the case of Kingfisher Airlines, a now-defunct Indian airline. It engaged in financial irregularities and inflated its profits prior to its IPO. Consequently, the company faced significant financial difficulties, and its stock value plummeted, resulting in losses for investors.

3. Be Cautious of Low-Quality Companies

Not all IPOs are equal. Some companies entering the market may have weak fundamentals, unsustainable business models, or poor governance practices. Investing in such companies is risky, as they may struggle to generate profits or even survive in the long run. A notable example is the IPO of Suzlon Energy, an Indian wind turbine manufacturer. Despite initial hype, the company encountered financial troubles, including a debt crisis, which led to a 90% decline in its stock value within just 12 months after reaching an all-time high of Rs.380.

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4. The Rollercoaster Ride of Market Volatility

The stock market is a wild ride, and IPOs are no exception. Market volatility and investor sentiment can significantly impact the performance of IPO stocks. Even well-established companies can experience substantial price swings due to market conditions or investor emotions. Let's take a look at the IPO of IRCTC, the Indian Railway Catering and Tourism Corporation. After an initial surge from the listing price of Rs.779 to Rs.1930, a 147% gain, the stock price sharply declined by 50% within one month. It then experienced a rally to Rs.5460, followed by another 40% decline. This rollercoaster movement reflects the unpredictable nature of the market.(Stock Split and bonus adjusted)

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5. The Countdown Begins: Lock-Up Periods

Lock-up periods are an important aspect of IPOs. They restrict insiders, such as company founders and early investors, from selling their shares for a specific period after the IPO. However, when the lock-up period expires, there can be a flood of insider selling, resulting in an increased supply of shares and potential downward pressure on the stock price. For example, let's consider the IPO of Info Edge India, the parent company of the popular job portal Naukri.com. When the lock-up period expired, some insiders sold their shares, causing a temporary decline in the stock price.

Conclusion

IPO investing can be an exhilarating adventure, but it's crucial to approach it with caution and a clear understanding of the risks involved. Keep an eye out for overvaluation, profit manipulation, low-quality companies, market volatility, and lock-up period expirations. By conducting thorough research and staying informed, you can navigate these challenges and increase your chances of a successful investment journey. Happy investing!

Some Important links- BSE-https://www.bseindia.com

NSE-https://www.nseindia.com

SEBI-https://www.sebi.gov.in

Disclaimer: I am not a registered financial advisor with SEBI or any regulatory authority. The information provided on this website/blog is for educational and informational purposes only. It should not be considered as financial advice or a recommendation to make any investment decisions. Before making any investment, it is crucial to consult with a qualified financial advisor who can assess your specific financial situation and provide personalized guidance. Remember, investing involves risks, and past performance is not indicative of future results. The content on this website/blog should not be solely relied upon for making financial decisions. Always conduct thorough research and seek professional advice before investing. The responsibility for any investment decisions rests solely with the individual reader.

IPOs: A Closer Look at the Highs and Lows of Investing