Recent times have seen multiple IPO listings. After the pandemic struck, the capital market saw the sentiments going down. The IPO listings paused after the SBI Cards IPO hit the market. After a brief period of 2-3 months, there has been a revival in sentiments as new IPOs are getting listed. We saw Happiest Minds, Route Mobile, Chemcon Speciality Chemicals, Mazagon Dock, and CAMS IPO listed recently. This reflects the trust returning back to the market.
An Initial Public Offer (IPO) is an initial offer of shares made by a company to raise capital from the public. Buying shares into a new company brings endless possibilities of growth. You can bid for shares through your broker. If your bid is accepted you will be allotted the shares otherwise you will get a refund. If you get the shares, you will become a shareholder of the company and receive dividends on the shares you hold. Or you can sell your shares on the stock exchange with the aim to derive profits.
Most IPOs with growth potential are oversubscribed. Hence, there is little chance of most retail investors to get an IPO at the offering price.
If there is no enough demand for an IPO, instead, it is less than the number of shares available for retailers then every investor will enjoy full allotment. On the other hand, if the IPO is oversubscribed, the retail investors will be selected by the lottery system and lucky ones get one lot. There are more chances that they will not be allotted.
Maximum Retail Individual Investor Allottees = Total number of shares available in retail category/Minimum bid lot
So, here are the strategies that will increase your chances to get an allotment of an IPO:
1. Check subscription status
Keep a check on the Upcoming IPOs and study the prospectus of the company to understand its fundamentals before investing. Before bidding, you need to check the subscription levels in the categories of High Networth Individual (HNI), Qualified Institutional Buyer (QIB), and Retail investors. If you find a good response, then you should apply for the IPO. If the issue is undersubscribed, you should apply for a large quantity otherwise, avoid it.
2. Bid Online with Multiple Demat Accounts
Apply for an IPO using different Demat Accounts. Multiple Demat Accounts must be linked to different PANs. If you apply for an IPO with five Demat Accounts, allotment chances increase to five times. There is no benefit of big applications for oversubscribed IPOs as per SEBI’s current allotment process, all retail applications less than two lakhs are treated equally. Therefore, the multiple accounts strategy is beneficial instead of making one application of five lots.
You and your family members can open different Demat accounts online. However, to sell the allotted shares you will need a trading account. It is a good idea to approach a broker that gives you the option to open a Demat Account.
3. Always choose the cut-off price
A Retail Individual Investor (RII) can increase the chance of shares allotment by bidding at the cut-off price. This may be tricky if you are not aware of the bid price and cut-off price.
A Bid price is the highest price offered by an investor to buy a stock, whereas the cut-off price is the price at which the IPO issuer is offering the stock.
If investors bid at the “Cut off” price then he is ready to pay the highest price band decided by the IPO issuer at the end of the book-building process. In this way, your application can not be refunded, whatever the final allotment.
The Bottom Line
That’s how one can invest in an IPO using strategies. Investors must always read the prospectus and select an IPO with strong underwriters and brokers. Whatever the investment type, the Demat account is a prerequisite. Find a broker that allows you to apply in IPOs and offers a quick and easy way to open a Demat Account.
Investing in IPO needs a certain level of research while purchasing as well as selling. While some IPOs get listed at a premium, investors tend to sell off the shares immediately. However, some IPOs have shown the potential to grow much more in value over time. On Feb 20, the shares of IRCTC were getting traded at Rs.1976 on the BSE, which delivered a 500% return to its IPO investors after listing. IRCTC was launched with an IPO price of Rs.320. It was listed on the stock exchange on 14 October 2019 at Rs.644.
Similarly, some investors tend to hold the allotted IPO shares over a period of time despite incurring losses. Here, the understanding of the company’s fundamental is essential. If your analysis tells that a stock is undervalued, you can wait for the value to appreciate over time. In that case holding on to the stocks make sense. However, if the fundamentals clearly show that the price is not going to appreciate, it is better to sell it off at the best possible instance that will cut down the loss.
