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What are the advantages and disadvantages of an IPO?

In this video, Dhirendra Kumar compares investing in an IPO versus investing in the secondary market

What are the advantages and disadvantages of investing in an IPO?
- Neeladri Shekhar Das

If we look at it from a very academic angle, there is absolutely no difference between buying an IPO and buying the stock of an existing company. In the case of an IPO, a guy or a set of people try to sell the stocks of a company to a large number of people who do not know much about the company. The company is relatively new, not much is known about it and the people who are selling it are the insiders. So, they are going to be the key beneficiaries and their objective will be to sell it at a high price. It is a major disadvantage of the IPO.

There is another disadvantage of the IPO. The entire process of selling the share in an IPO eventually turns out to be a lottery. If it is a good company and if there is a huge demand based on the information or the story being weaved or the PR machinery or for whatever reasons, many people usually want to buy the stock but there is a limited supply. So, scarcity gets created. That is why, IPOs get oversubscribed like we recently saw the Happiest Minds IPO being subscribed by 150 times.

So, this lottery element actually makes it a very funny business. When you are buying a stock, you become the owner. And this lottery element creates an impression that if you get the allotment, sell it and run. You make quick profits. So, IPO is perceived as the mechanism of making quick profits if you get lucky with the allotment.

I think you should invest in an IPO as and when you get the opportunity but not for the lottery element. Do it just because you will get some allotment in a good company. And I don't think the rules of investing in the IPO change simply because it is being sold for the first time. You should be investing in an IPO exactly for the same reason that would want you to hold the company for a long period of time. But its dynamics are different. Luck plays a far greater role. If you get lucky, you make quick money here.

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