Research analysts believe that Initial Public Offerings (IPO) tend to perform better on the day of listing when compared to the other trading sessions in the future. Past data suggests that it is advisable to divest your IPO investment on the day of its listing to maximise your returns. According to Prime Database, 177 of the top 200 IPOs have completed at least a year since their listing. Of these, 99 stocks had one-year returns that lagged behind listing day gains. In addition, for 84 stocks, the year-end price fell below the IPO issue price.
However, selling the IPO on the day of the listing should be at the investors’ discretion. Investors can better analyse the market conditions and the objectives of their IPO investments. A long-term goal, backed by data-driven forecasts, would not allow the investors to dilute their positions on the day of listing, and this is also an acceptable approach. This article evaluates different scenarios to guide the investors with their upcoming IPO investments.
Take an example of one of the significant IPOs in 2010 – Coal India Ltd. The company raised capital of nearly Rs.15,000 crore following its IPO. The returns generated by its stock on the day of listing were 39.7%. The stock generated 33%, 43% and 19% returns at the end of the first, second and third years, respectively. We can see that the stock generated significant returns on the day of listing but also displayed a strong performance in the coming years. While the listing day can potentially yield better returns, a good stock will continue to do the same in the coming years. Investors can apply for such IPOs through their brokers, who help them open a Demat account online on their platforms.
The timing of diluting an IPO investment is per the investor’s need; however, here are a few factors that one can consider before deciding when to sell their IPO shares.
Investors looking to sell their IPO holdings on the day of its listing should be wary of its tax implication. The gains arising from this transaction can be taxed under short-term capital gains. On the other hand, the tax imposed on long-term capital gains is lesser and can help the investor save on taxes. However, the investors need to weigh both situations and decide accordingly.
Certain stocks come with a lock-in period which restricts them from being sold until the lock-in period is over. The companies implement these restrictions to safeguard their shares from being dumped in the stock market. Investors should be wary of any such conditions before investing or consider the lock-in period before deciding on the timing of their sale.
IPO investments are also subject to market risks like any other investment option. Investors should consider their risk appetite to build their investment strategies, including the timing of their sales.
There are numerous ways using which investors can look to divest their IPO holdings. Let us briefly analyse some of these:
One of the most effective ways to generate significant returns on your IPO investment is to sell all the shares on the day of listing. Research and past data analysis suggest that the gains on the day of listing are better than what the stock generates in the longer term.
Investors can recover their invested amount by divesting partial shares on the day of listing. The partial divestment is equal to the actual investment amount, while the remaining shares are kept for the longer term.
For example, an investor holds 100 shares of Rs.10 each.
The total investment is Rs.1000.
Suppose the stock price on the day of listing shoots up to Rs.20 per share.
In this scenario, the investor can recover the total investment by divesting 50% of the IPO holding.
This approach also hedges against the risk of losing capital and enjoys both short-term and long-term gains.
Investors can also follow an approach to sell their holdings periodically. It gives them time to analyse the stock’s actual performance and make the most of the various catalysts contributing to its price. This approach carries an element of risk and requires close monitoring of the stock and the overall stock market performance. This approach is more suitable for regular investors with the time and resources to monitor the stock markets.
Historical data suggests that IPO investments generate maximum returns on their listing day. However, every investor comes in with a unique set of requirements; what works for someone may only sometimes work for the other. Hence, the exit plan needs to be established by investors only after analysing the different factors that impact their investment. Long-term goals, investment objectives, taxation, and the stock itself needs a meticulous evaluation before deciding on an exit strategy that leads to profit maximisation.