Initial Public Offerings (IPOs) have been quite the enticing deal since aeons, making investors drool at the realistic thought of doubling their money within a day by cleverly investing in IPOs.
That held true in over the last two years as well. The average one-day gain for the 80 IPOs between 2020-2022 was 26%, with the highest being Paras Defence and Space Technologies at a whopping 185%.
This got us thinking - what if you applied to IPOs, and sold them after day 1? Would you make enough money? The answer is YES!
How Much Money Are We Talking About?
If you were the luckiest investor on the planet and were allotted shares for all 80 IPOs, you would have made an average listing day return of 26% - an amount most mutual funds can’t make in a year!
However, most IPOs lost steam after that. The average gain from Day 2 of being listed on the markets till today has only been 15%. Mind you, 26% is the one-day gain, whereas 15% is the gain over whatever period they've been listed for (an average of 384 days).
Check out the massive listing gains by the top 10, of the 80 IPOs over the last two years, and the relatively poor performance after.
Top 10 IPOs (basis first day gains) | Listing Gains | Returns To Date | Returns from day 2 to now | Number of days of being listed |
|---|---|---|---|---|
Paras Defence And Space Technologies Limited | 185% | 309% | 43% | 345 |
Latent View Analytics Limited | 148% | 93% | -22% | 292 |
Burger King India Limited | 132% | 120% | -5% | 636 |
Tatva Chintan Pharma Chem Limited | 113% | 132% | 9% | 409 |
Indigo Paints Limited | 109% | 3% | -51% | 586 |
G R Infraprojects Limited | 109% | 58% | -24% | 419 |
Mrs. Bectors Food Specialities Limited | 107% | 30% | -37% | 626 |
MTAR Technologies Limited | 88% | 183% | 50% | 545 |
Route Mobile Limited | 86% | 318% | 125% | 720 |
Go Fashion (India) Limited | 82% | 77% | -3% | 285 |
💡 Verdict - You’re just better off applying for IPOs, and selling them off after the first day!
Why Does This Happen?
When an IPO is launched for the public to invest in, depending on whether the company is financially sound and there is significant growth potential, investors rush to put their names into the running
Since there are limited number of shares, allotment is purely based on luck, but the demand for the share plays a role in deciding how much it lists for
If the demand far exceeds the supply (oversubscription), yet only a select few get the shares, chances are that the share will list at a higher price on it’s listing day as the demand drives it forward
Moreover, investment bankers usually engage in a practice called ‘leaving money on the table’. This simply means they price the IPO at a discount relative to the fair value of the stock, just to make it more attractive for investors to invest in the company
And hence, more often than not, listing gains are pretty common!
You Can't Do This Without Luck
All this was easy saying theoretically. But you need a fair amount of luck to be able to successfully get shares allotted before listing.
Since there are more people applying for it than the number of shares, it’s a game of luck. And if the company is particularly good (or exciting), then you need even more luck.
How to navigate this?