When to Invest: Pre-IPO, at Listing or Post-IPO?

Introduction

A lot of companies are going public this year. It is a frenzy for IPOs out there. Everyone wants a slice of the pie of a new hot cake stock market listing. 

That has led to oversubscription in many companies. Beauty e-commerce companyNykaasought ₹5,300-crorefrom the IPO. The company received 80 times more subscriptions. So what happens if you miss the IPO boat? There are other ways. 

3 Options to Invest in a Company Going Public

Applying for IPO shares on day one of the listing isn’t the only way to gain a stake in a company going public. You can also:

• Apply for a pre-IPO placement
• Post-IPO placement, i.e. purchasing in the secondary market

You can use ICICI Direct’sIPO portal to track IPOs and post-listings to make your investment. 

What is Pre-IPO Share Placement?

A pre-IPO placement is when a company allows investors to invest in the company before it goes public. Essentially, you are investing in a private company that plans to go public someday. The most significant advantage of investing in a pre-IPO placement is the discounted value of the shares. At listing, the price typically goes up. 

However, there are some things you must note with pre-IPO share placements:

• Since it is essentially a private company, it will be less transparent and subject to milder scrutiny by India’s Securities and Exchange Board.
• Investors will be subject to a lock-in period, usually one year, during which they cannot sell their shares. That means you can’t take advantage of a price rise during the initial days of listing.
• Lot sizes for pre-IPO placements are usually larger, which means that you will have to make a more significant investment.

What is Post-IPO Share Placement?

A post-IPO share purchase is simply buying the shares of the company in the secondary market. After shares have been listed, they can trade freely on the stock market. A willing seller will sell you the shares at the market price. However, you stand the chance of investing at a high rate. Very often, after listing, a company’s shares are overvalued for the first few days. It may make sense to wait for a while to check the actual value of a company before investing in it after the IPO. 

When Should You Invest?

While most investors want to take advantage of the IPO pricing, and the thrill of getting allotment on day one of a company going public is something else, it may not always work out. In such cases, post-IPO share purchase in the secondary market is not a bad idea. It can give you some time to evaluate the company’s actual value and invest depending on how the company is performing. You will also get an opportunity to check whether company insiders are holding on to their shares after the lock-in period, which can give you assurance about the company’s potential. 

If you have done your due diligence and are confident about the valuation of a company, then a pre-IPO purchase is not a bad idea either. As mentioned before, it can allow you to enter early. However, only take this route if you have done adequate research and have enough capital to spare. Don’t rely on company information alone since it may be incomplete, given it is private company at the time of investment. 

Conclusion

A new company going public that exhibits strong fundamentals is a good investment opportunity. When you invest in the company depends on what your requirements are, and also, an element of luck at the time of IPO shares allotment. Don’t worry too much if you miss that boat because a company with strong fundamentals will give you good returns in the long run anyway. You can use ICICI Direct’s IPO portal to invest in the many upcoming IPOs this year. 

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing.