IPO Investing 101: From Red Herring to Wealth Creation | A Comprehensive Guide to the Primary Market

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Investors have a multitude of options to generate wealth through equity. One way is by purchasing shares in the secondary market. Another option is to invest in mutual funds. Additionally, they can seize the opportunity to acquire shares in the primary market when they are first released, which is known as IPO investing. IPO stands for Initial Public Offering, and that's precisely what we'll delve into today.

Over the last three years, ever since we ventured into the primary market, there has been a significant surge in the number of companies choosing to go public and get listed in the stock market. The momentum is undeniable, with the stock market experiencing an unprecedented number of IPOs in 2022 and 2023. This trend is set to persist in the coming years.

IPO Initial Public Offering

How Is Investing In IPO Adding To Your Wealth?

Are you curious about how IPO investing contributes to your wealth? Can you utilize it to generate wealth for yourself? Let's delve into this topic further. First, let's examine the process of investing in shares through IPO. IPO involves investing in companies entering the stock market for the first time.

What Is The Process Of Investing In Shares Through IPO?

Whether it's raising capital or participating in an offer for sale, companies have various options to explore. In an offer for sale, existing investors sell their shares, giving you the chance to invest. It's worth mentioning that these opportunities have a short window, usually lasting five to six days.

1. RHS Red Herring Prospectus

If you're looking to invest in an IPO, here's what you need to do. Start by visiting either the SEBI website or the company's website. Once there, you can access the red herring prospectus, which has been given the green light by SEBI. This prospectus contains all the comprehensive information about the company.

By reviewing the red herring prospectus, you can access essential financial and non-financial information to evaluate whether investing in the company is a wise choice. It's a crucial document to consult before making a decision.

Check out the video link for a more in-depth understanding

2. ASBA Applications Supported by Blocked Amount

Next up, you need to ensure that you have a Demat account that's live and is working.
Third, you need to go to the website. Either your demat, your bank, or the website of the company, and then register your claim to apply during the application period. 

Usually, as a retail investor, your maximum ticket size for the investment is 2 lakhs. So if the company has a price of ₹150, then you will need to apply for that many lots as the company prescribes so that the total value of your investment is not about two lacs. So that's very, very important.

You don't need to write a check or transfer money for these investments. Instead, you follow the ASBA model, which stands for "application supported by the blocked amount". This means that when you apply through ASBA, the money stays in your account and doesn't move out.

Your money will remain in your account, but it is temporarily held for this IPO. Once the issue closes in five days and the allotment process is finished, either the shares allotted to you will be deducted from this ASBA or the ASBA will be removed. This will give you the freedom to use the money as you please.

ASBA is a system that ensures your money remains in your account until you are allotted shares. The allotted shares are then reflected in your demat account. This is how an IPO application works. After applying, you wait for the listing date. Every IPO that is listed after allotment must be listed in either the BSE or the NSE, allowing you to sell the stock if desired.

Selling your asset within 365 days will result in a short-term capital gain, which means you'll be taxed at the highest rate applicable to you. However, if you hold onto it for 365 days or more, it becomes a long-term gain and you'll only be taxed at a rate of 10%. This is the key distinction between short and long-term gains.

For those looking at the big picture, holding onto your investments for over a year is a smart move. Here are some dos and don'ts to consider when diving into IPOs. Let's start by discussing the things you shouldn't do.

Don’ts Of Investing In IPOs

• IPOs can be compared to marketing vehicles, you know? When a company goes public, they flood the market with advertisements. It's all shiny and bright, with a buzz of excitement surrounding the company. Don't fall for it. Take the time to analyze the situation yourself, do your research, and rely on solid facts about the company. It's crucial to do your due diligence.
• To stay on the safe side, make sure you have a designated amount set aside for this IPO. The good news is, that many people offer margin funding for IPOs, which means they extend additional credit to increase your chances of receiving a larger allotment.
• Many times things don't turn out as planned. Avoid being greedy. Invest what you can afford, and stick to your budget. Don't chase fast money. IPOs offer an early opportunity to invest in a company, not a chance to fulfill all your desires. Don't expect to make big profits quickly.

Check out the video link for a more in-depth understanding

Do’s Of Investing in IPOs

• IPO is just one option for investing. Don't feel pressured by FOMO - Fear of missing out. Many people lose money by rushing into IPOs they didn't need to invest in.
• If the stock is good but lists at a lower price after the IPO allotment, you will still receive shares. This presents a chance to enhance your investment by doubling down on it. Take advantage of this opportunity and consider purchasing more shares, as long as you have confidence in the company's prospects. You should consider increasing your investment and putting more money into it.
• Additionally, it is crucial to take a long-term approach. It is important to retain these investments until the company reaches a certain level of maturity, as this is when you can expect to reap better returns. Instead of solely focusing on listing gains, which occur at the moment of listing, it is advisable to aim for gains that surpass the initial listing phase.

How Do Smart Investors Make Money On IPOs?

Look ahead. If you're confident in the company's long-term prospects, these approaches could lead to gains. Curious about how astute investors profit from IPOs? Well, for one, they steer clear of hearsay, speculation, and shortcuts. Instead, they roll up their sleeves and do their research. Take a close look at the red herring prospectus.

SEBI mandates an extensive amount of information from these corporations, a significant portion of which is contained in the red herring prospectus. This prospectus offers a thorough analysis that demands your commitment to delve into it.

Remember, not all top-performing companies are the most eye-catching. Consider Infosys, for example, which faced an undersubscribed IPO and had shares listed below the offer price. The key is to look beyond the shiny exterior and focus on the hidden gems that offer great value.

Finally, make sure to set aside a portion of your investment for IPOs. Whether you have multiple buckets for various investments like mutual funds and fixed deposits, make sure to create a specific bucket for IPOs and invest accordingly.

Check out the video link for a more in-depth understanding

Allocate A Certain Portion Of  Your Investment Into IPOs

Having a budget in place for IPOs is always a wise move. It sets the foundation for your operations and enhances your prospects of coming out on top. Nevertheless, it's crucial to acknowledge that there have been winners and losers in this arena. In recent years, some notable losers, such as Paytm, have witnessed a significant erosion of value for investors.

Paytm is a popular brand that many people adore, but it's important to remember that brand reputation doesn't always translate to financial success, especially in the stock market. Don't assume that every brand is a guaranteed wealth creator. Surprisingly, some lesser-known brands have generated significant wealth for investors.

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