For retails investors its better to avoid IPOs forever. When there are thousands of great companies to choose from why invest your money in an IPO?
Let me start with this – after the losses in the DLF IPO and the SHIPPING CORPORATION OF INDIA Ltd. IPO – I was done with IPOs. I mean I took a permanent decision NEVER to invest in an IPO. And that stands even today.
There are a lots of reasons why you should not invest in an IPO.
I have listed 8 reasons why you should not invest in an IPO.
1. Premium Just Too High: The company may be doing great (just like DLF) so they will price in the cost as premium in the IPO. Poor investors pays the premium to participate in IPO only to realize that the information they got from the company was fabricated. Read this to know SEBI penalized DLF for hiding information in their offer letter of IPO.
2. No Guarantee of Listing Above Premium: Like I said IPOs do not come for free – investors have to pay a premium. Once they pay a premium there is no guarantee that the IPO will list above that. Barring few, most IPOs actually list below their offer price level. And again its the retail investors who sell to limit losses on the listing day.
3. No History of the Company: Its tough to analyze a stock of an existing company – but at least you can see last one year low and high, moving averages etc. But with an IPO there is no history to analyze. The only thing we have is the offer prospectus. Just believe whats written there and invest. This is not correct way to invest.
4. Listing Day Trading: On the listing day the stock does not behave normally. Almost 80% of the investors are either looking to book profits or take out loss. This is risky. On that day again the retail traders lose money to big investors. How? You will see that as soon as the stock opens for trading on the listing day it opens way above the listing price – at that time its the institutional investors who are able to sell and book huge profits. Retail investors are busy traveling to their workplace or have totally forgotten about the IPO. The ones who buy it as soon as the markets open for trading are the Intraday trades looking for a quick profit. Alas their money just goes away to the institutional investors. Now by the time retail investors come into action – the stock may already be trading way below the offer price. Ruing their decision not been able to book profits – they either wait for a better price or sell at a loss. Intraday trades gifted cash to institutional investors and close their trade. 🙂
And for those retail investors who were not willing to sell at a loss – their wait sometimes goes on for years and still they do not even get their break even price.
See the image – DLF still trading below its listing price even after 8 years. See this:
5. No Clear Reason For the Premium: I have never seen any company coming with an IPO giving clear reasons as to why they have offered such a price. They create a hype by means of advertisements and when the hype is generated – depending on the kind of hype a price band is reached at. Well I may be wrong but this is what my experience says. If anyone has any knowledge of how the offer price is reached at please share in the comments section or email me. But I have not seen a single IPO in the last few years offering a reasonable offer price. All are offered at least 20-25% more than what they deserved to be priced. But since its almost certain they will get the money they are asking from the market – such an offer is given.
I block-quote this from investopedia.com:
For many investors, the only real exposure they have to the IPO process occurs a few weeks prior to the IPO, when media sources inform the public. How a company gets valued at a particular share price is relatively unknown, except to the investment bankers involved and those serious investors who are willing to pour over registration documents for a glimpse at the company’s financial.
So basically create a media hype – offer a highly priced IPO – extract money from general public – and NEVER return their money – how easy.
Then money travels from one shareholder to another – the company keeps the billions of cash for ever.
6. Small Offer Makes Small Money: And this one is perhaps the most important point why people like me and you should never invest in IPO. See retail investors get 30-35% of shares. So the maximum application size cannot exceed 100,000 to 200,000 per investor. Even if you go for the maximum size you will be only allotted 30,000 – 40,000 worth of shares. Assuming you get lucky on listing day and were able to sell at a 10% profit. You make anywhere between 3000-4000 in about a month. Can Rs. 3000 really make a difference to your life? Think about it what can you do with Rs. 3000? Nothing really. Why then take the hassle of investing in IPO?
7. All Money Blocked: If you apply for maximum allotted shares for retail investors – you will have to part with all the cash for a few days until you are allotted the shares. The cash that was unused will be refunded back to you. The whole process will take about a month. And there you are, really worried about your 1 lakh 70 thousands in the hands of the underwrites of the IPOs (the brokers like Karvy etc.). Now days at least its all online but just a few years back they used to courier the checks. Now what if the courier doesn’t reach? What if there is a spelling error in the check. Send the check back by courier, write an application, wait for another month for the courier to arrive. Do not sleep well to get back your own money. And people who don’t have an online Demat account still have to go through these ordeals I think. But I am sure its all finished now thankfully.
8. Stocks Not Arriving: You know what. When I applied for DLF IPO I got some stocks worth Rs. 15,000. And to my horror the stocks NEVER arrived in my Demat account due to some “technical mistake”. If I remember I was running from pillar to post on the listing day to get “my” shares which I had already paid for to be in my trading account. Yes three applications and a waiting period of 7-10 days. And the worst part I applied online through my broker. If you think online things can’t go wrong – then you are wrong. Well anything can happen. I still cannot forget that ordeal because by the time I got the DLF shares in my account it was trading well below the offer price. DLF if you remember opened bumper on the listing day and then after a few days still biting dust.
In view of the above I request you to NEVER EVER subscribe to an IPO. When you can always buy the same companies shares later why go through all the hassles of an IPO?
That’s the reason I sent you an email to stay away from Interglobe Aviation Limited (IndiGo) IPO.
Tell this to your kids as well and your friends. We have enough companies in our hands to trade. Let others participate, you stay away.
Many thanks for reading this really long post. Please share your IPO experiences in the comments section below. Will really make for an interesting read for all of us.
You Can Read More On My Site
Hi, I am Dilip Shaw, owner of this website. I am a trader like you. I have been trading since 2007, but lost a lot of money till 2010. I then stopped trading and studied options like college exams. Started trading again from 2011 and never looked back since. I did a lot of research, read books and did countless paper-trading before being profitable. You can read about me here.
My conservative trading course since 2014 is helping many retail traders just like you who have a job or business make consistent profits like this:
What Traders Say About This Course
Testimonials Year 2015
Testimonials Year 2015 Page 2
Testimonials Year 2015 & 2016
Testimonials Year 2016
Testimonials Year 2017
Testimonials Year 2018
Testimonials Year 2019
Testimonials Year 2020 to 2023
What People Say Just After Reading My Course
Emotional Testimonial by a Young Woman Trader and Her Mother
One Of My Client Is Making Rs.25k Per Week
Difference Between Other Courses And Mine
What Others Charge for Courses
You can do this course from your home. Some traders make amazing profits like Rs. 16.26 lakhs profit in 5 days though results may differ for all.
This course helps you learn to trade conservative option strategies for monthly income. Once you finish the course you can start trading immediately. You can start trading from any day. No need to wait for expiry. You will make profits consistently.
This course is good if you have a regular job or business. You DO NOT NEED to monitor your trades every second.
What You Get?
Before reading please understand that for all 5 strategies, strike selection will be taught. Strike selection while trading Options is the most essential part to succeed.
You get two conservative non-directional strategies on options, one conservative stock option strategy and two conservative directional strategies on Future & Option combination.
Non directional trades are profitable 80% of the times and make 3-5% per trade (Results may vary).
Directional strategy makes money fast. It does not matter which side the stock moves. In fact you make more when you are wrong in the Future trade. 🙂 Some amazing profits possible here.
The stock option trade makes 30,000 in one trade and if SL is hit there is a way to recover losses plus make 30k in that trade.
Technical knowledge is NOT required. No need to monitor trades every second.
In the course you will learn how to select the strike prices. You learn when to trade, which strikes to sell which to buy, how much profit target you should be looking for, the best place to take stop loss and what to do after taking stop loss – means how to get that money back. The success rate is more than 80%.
Since trades are properly hedged there is no stress in trading my strategies.
I am very confident that you will make money trading my strategies. To help you succeed I offer few months support for FREE.
11 Reasons Why You Should Do The Course:
1. TA Knowledge NOT required
2. NO Software Required
3. Regular Monitoring NOT Required
4. Continue with Your Job
5. Do Course From Your Home
6. 100% Hedged
7. Stress-Free Trading
8. Not too much money needed to trade
9. Scaling Possible
10. One Time Fee
11. FREE Support For Months
To know more Call/SMS/WhatsApp me on 9051143004 or email me now. I know English and Hindi.
Read the details of the course here.
If you want to enroll for the course you can do so here.
P.S: So many years of trading has thought me one thing - it is always better to make small profits month after month, rather than lose money month after month trying to make too much money. It never happens. But small money accumulated month after month can become very big in only a few years.
WhatsApp or Call me: 9051143004
If you have any question you can contact me.
You can read about me here and my trading mistakes here.
Dilip Shaw, Founder
Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.
DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. In other words I am a sub-broker. I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other forms of social media. I strictly adhere to laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles in this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given in this website. I am not responsible for any investment decision you take after reading any article in this website. Click here to read the disclaimer in full.