This article will explain HOW TO SELECT BEST IPOs and reveal some interesting facts about IPOs.
Let’s understand everything about IPOs.
Be it ZOMATO, IRCTC, UJJIVAN, or CSB BANK. IPOs had always been fascinating when it comes to getting some financial gain from the equity market.
Predominately I will be explaining about three main things about IPOs, and they are:
- IPO Myths
- 80% of IPOs are bad
- IPO selection formula
Let’s take each point at a time :
One of the biggest myths about IPO is they you can become rich overnight. This doesn’t seem right with no clear evidence from the past. Also, these days, many news channels, social media, and YouTubers are spreading this illogical news about IPO. This is not possible with IPO.
There are simple reasons why IPO’s is not a quick-rich scheme:
- Firstly you cannot put in as much money as you want. It is not like regular stocks where we can buy as much as we can. For example, if we’re going to buy ITC shares, we can buy as many as per our limitations. IPO is allowed in LOTS, and one 1 LOT is of around INR 20-25k
- We recently knew that in the IPO of ZOMATO, IRCTC was booked more than 100 % that means out of every 100 applicants, only one got lucky.
- For success in IPO, you need to be lucky, which is not in your hand.
- Even if you are lucky enough to get the first lot, you can hardly earn more than 20-25k maximum.
- That proves that IPO is not a shortcut to getting rich.
Now let’s talk about the next point why I reject 80% of the IPO. Let me tell you the reasons in detail :
Whenever we buy any listed stocks like Asian Paints from the market, then the pricing depends upon the two parties that are seller and buyer. There will be some negotiations, and if everything goes well, then the deals get done.
But my questions in IPO who decides the price, The government didn’t interfere with pricing its the owner of the company who decides what should be the stock price.
Now imagine you want to sell a piece of land as you need money, so you want maximum profit by selling that land, and you will not go for a fair pricing policy. This means if somebody is paying 20 lacs, but the market value is only 14 lacs, you will also take the deal happily.
Similarly, while issuing IPO, company owners want the maximum value of their shares as they give the general public part of their shares. That is why we generally see after the IPO that the share value, which should be around 500-600, is 20% or more expensive as the company owners tend to become greedy.
That is why I reject 80% of the IPO.
HOW TO SELECT BEST IPOs
Now, let’s focus on selecting the 20% of the IPO that comes into the market. This would be the most exciting part of the article. I will tell you the three ways to choose the IPO to invest in.
Firstly let’s take the same example of the landowner who wants to sell his land at the best rates, but somehow the situation changes and someone in his family met with an accident, and now he wants to sell his land quickly to get money for hospital expence.
Even if he gets 10-20 % less than the expected price of the land, this generally happens in the IPO of small finance banks, Banks, and BSE, where they have pressure from the government to get listed in the stock exchange.
There are many RBI, SEBI guidelines for small finance banks, stock exchange to get listed quickly in few years; if they cannot do it in the stipulated time, they will be penalized heavily. Because of this pressure, they have to initiate the IPO at a lower rate to get it fully subscribed.
Because of so many regulations and pressure from the government, they are reasonably priced and not overprize. Examples of these types of companies are banks, small finance, and BSE, etc. There is always a fear that if by chance, the price they choose doesn’t help them to subscribe, then the government will impose a heavy penalty on them.
The second type is government IPO. You can generally see a reasonably priced IPO as the government didn’t want to tarnish its image by asking for a premium price from the general public.
Also, to maintain the demand and hype of their companies, the available public buying shares and their IPO should get oversubscribed. Thereby improve the image of the ministry.
The government of any party didn’t want to tarnish their image by selling IPO at a premium price.
Also, this doesn’t mean that I invest blindly in all small finance banks and all government IPOs. After putting in the two significant filters, I finally put the 3rd filter, which is most important. IPO generally comes for three days, and if I am applying for an IPO, it will be on the 3rd day.
The reason for the same is that in 2 days, I will come to know through the news how many times it has over-subscribed. On 3rd day I have much clarity about this IPO.
If an IPO has been oversubscribed many times, people will surely gain from it on the day of listing.
The point here is simple you apply on the first day or 3rd, it will hardly make any difference. It’s just that if you are applying on the 3rd day, you will have a fair idea about the general public’s sentiments.
Now one last piece of advice amid the overcrowded IPO market don’t invest everywhere. Please use the filters as I told you, and you will benefit from good returns through these IPOs.
Also, again I am reiterating that almost 80% of the IPOs are not worth to invest.
Thank you for your time.
Please go through my other articles as well.