The IPO conundrum: Fear Of Missing Out

The single most reason for most investors who prefer IPO route to get into stock market is FOMO – fear of missing out. Not everyone who applies for an IPO is allotted shares and that makes the process precious. The demand and supply economics. Whatever is in short supply demands higher valuation.

So, any IPO is a FOMO for anyone who sees allotment at initial price as a valuable proposition. And regular IPO backers will say they did earn some quick bucks in many allocations. These investors go by consumer trends and emotional values rather than financial benefits. PayTM is a great example of how people rushed on consumer trends and lost the money. However, Zomato is another example of consumer trends but gained well. It can, therefore, go both ways.

That is to say they may have got 1 in 10 applications and that one may have got them good returns. The balance 9 may have got refunded without allocation. So for a passive investor who is not attuned to the stock market returns, this is a good reason to stick to their love for IPOs. Their hope is getting peak pricing on debut and aim is to make quick money irrespective of the potential of the stock they own.

When one calculates the return IPOs give to investors, the holding period also must be put into the frame. Most IPO holders sell as soon as the listing takes place. Listing day gains is different from wealth creation. In the last 2 years, 50% of the IPOs gave positive return while the remaining went into the red zone. The immediate selling pressure after listing also contributes to the prices falling at the initial stages. But hardly any investor goes through the prospectus or the company potential to hold on to the allotment they have got.

Now for those who doesn’t even go through basics, it is needless to ask to see how a company is overvalued or undervalued. Or that they should look at financial metrics like EBITDA (earnings before interest, taxes, depreciation and amortization) to see the potential in investing.

Very few in the retail IPO investing have any idea about SME IPOs. They have gained momentum in the recent past. For companies, this is a cost-effective route and after a period of 2 years and with very little compliance it canenter the main board. To list, the DRHP and Prospectus are vetted by the stock exchanges and not SEBI. Market making is mandatory so that some liquidity can be brought in. This leads to operators entering the market. However, the interest of risky investors to SME segment has grown manifold in the recent past.

Another concern is how underwriters set a valuation and establish an IPO price for the company. In most cases, these prices are not justifiable. But when the IPO is listed, it enters the secondary market where prices stabilize according to the performance of the company. This is the reason why many stocks fall flat after it enters the secondary market.

And last but not the least is where does the money collected through IPO ends up? It certainly doesn’t end up in company coffers for any business development. It actually is a route for existing investors to get out of the company which they have funded, nurtured and built. Now is the time for them to reap returns. Their place is now taken by retail investors. Then there are lenders who must get their money back. If you read the red herring prospectus of the offering, this is very clearly mentioned. But does anyone care to read? Now SEBI has started taking notice and tightened scrutiny over companies opting to raise money for debt repayment.

But most serious retail investors see no value in getting into the market through IPO route. There are thousands of companies in the market that has more potential than a new bloke just entering the market.

All you need is to identify the companies and stay invested.