For investors in the Indian market, Initial Public Offerings (IPOs) are a significant area of interest. It is important to maintain a balanced perspective because going public does not necessarily indicate that a company has achieved financial stability.
The considerable attention that IPOs receive can sometimes lead to misconceptions. So, what are the principal myths surrounding IPOs in India that require careful attention? Let us analyse IPO myths and misconceptions to promote informed and confident investing.
6 IPO Myths And Misconceptions in India
An Initial Public Offering (IPO) is a big step for a company, shifting it from private to public. IPOs draw much attention from investors, analysts, and the media in India. Here are some of the IPO myths:
Myth 1: Investing in an IPO Guarantees High Returns
A common misconception about IPO is that they’re an easy way to make money. Many expect the stock price to soar on the first day, and while some IPOs perform well, plenty don’t. It’s not a guaranteed path to wealth.
Reality
The performance of an IPO depends on multiple factors, including:
- Market conditions: If the overall market sentiment is bearish, even a fundamentally strong IPO may struggle to perform well.
- Company fundamentals: The financial health, management quality, and business model influence long-term returns.
- Valuation: If the IPO is overpriced, it may fail to generate major returns post-listing.
Myth 2: A Popular IPO Is Always a Good Investment
Many retail investors think an IPO with high demand or oversubscription guarantees success. They assume it’s a safe bet because big investors buy in.
Reality
Oversubscription reflects demand, but it does not guarantee long-term returns. Several factors must be considered:
- Speculative interest: Many investors apply for IPOs to make quick gains on listing day.
- Hype vs. substance: Some IPOs create hype through aggressive marketing, making them appear more valuable than they are.
- Exit strategy of early investors: Promoters, private equity firms, and early investors often use an IPO as an exit strategy. They sell at high prices, leaving retail investors with expensive shares.
Myth 3: Investing in IPOs Is Risk-Free
Many people believe IPOs are a safe bet, especially when launched by big companies. Media hype often makes them seem like a quick way to earn easy money. This has made IPOs one of the most common stock market myths.
Reality:
IPOs come with risks, just like any other stock, because:
- No past record: IPOs are new to the stock market, so there’s no history to check.
- Lock-in period: Early investors cannot sell immediately. When they do so, the prices will drop quickly.
- Market impact: Economic changes, such as interest rates and inflation, can have a massive impact on the IPO performance.
Myth 4: IPOs Are Always Priced Fairly
Many think IPO prices are based completely on an enterprise’s real worth. But that’s not always true.
Reality
IPOs are priced in two ways:
- Fixed pricing: In this method, the company and its bankers set the share price in advance before the IPO opens to investors.
- Book building: Investors bid within a specific cost range, and the final cost relies on demand.
But here’s the catch: pricing isn’t always appropriate.
- Market hype: If the market increases, organisations might set higher costs to raise funds.
- Banker influence: Underwriters (the individuals who control the IPO) sometimes push for higher costs to help all early investors.
Myth 5: Any Company That Goes Public Is Cash-Rich
It is a myth that companies launching IPOs are financially strong and have plenty of cash.
Reality
Most companies launch an IPO to raise capital, not because they already have surplus funds. The money raised through an IPO is typically used for:
- Business expansion: To fund new projects, upgrade technology, or enter new markets.
- Debt repayment: To lower existing loans and strengthen financial stability.
- Operational expenses: To support day-to-day operations and manage short-term cash flow needs.
Myth 6: Investing in an IPO Means Becoming an Early Investor
Many people think buying IPO shares means investing at the very start of a company’s growth. But when a company goes public, the early investors have already bought in and often made profits.
Reality
Before a company goes public, it raises money from:
- Private equity (PE) and venture capital (VC) firms
- Angel investors
- Founders and early backers
Invest Wisely: Beyond the IPO Hype
Learning about IPO myths allows you to invest carefully and trade carefully while saving and investing, making it easy to understand the workings of an IPO.
Apart from knowing what is IPO, examining the organisation’s financial situation and real growth possibilities is important. You should also find out if the price is reasonable. In the stock market, smart decisions always beat blind bets. Do your research, be patient, and think long-term. Join the Dhan Made For Trade community of like-minded investors to enhance your trading and investment journey.
