Initial Public Offerings (IPOs) are an exciting opportunity for investors to own shares in a company that’s going public. IPOs offer a unique opportunity for investors to participate in the growth of the company from an early stage. However, getting allotted shares in an IPO can be a challenging task, as the demand for shares often exceeds the supply.
In this article, we’ll discuss proven strategies to increase your IPO allotment chances and maximize your returns.
Understanding IPOs: A Brief Overview
Before we dive into the strategies to increase IPO allotment chances, let’s take a brief look at what an IPO is and how it works.
What is an IPO?
An IPO is a process by which a company goes public, offering its shares to the public for the first time. The company raises capital through the sale of its shares to the public. The shares are offered to the public through an initial public offering.
Why do Companies go Public?
Companies go public for a variety of reasons. The most common reason is to raise capital to finance their growth plans. By going public, the company can raise a large amount of capital by selling its shares to the public. Additionally, going public can help the company increase its visibility and attract new customers, partners, and employees.
How does an IPO work?
In an IPO, the company issues new shares to the public, which are sold to investors through an initial public offering. The shares are priced based on the demand for the shares, and the price is determined through a process called book building. The shares are allotted to investors based on the demand for the shares and the availability of shares.
Types of IPOs
There are two types of IPOs:
- Fixed Price IPO: In a fixed price IPO, the company fixes the price of the shares and the investors bid for the shares at that price.
- Book Building IPO: In a book building IPO, the company does not fix the price of the shares. Instead, the investors bid for the shares, and the price is determined based on the demand for the shares.
Benefits of investing in IPOs
There are several benefits of investing in IPOs, such as:
- Potential for High Returns: IPOs offer investors the opportunity to invest in a company from an early stage, which can lead to high returns.
- Opportunity to Invest in Quality Companies: IPOs often offer investors the opportunity to invest in quality companies that are going public for the first time.
- Liquidity: Investing in IPOs provides investors with an opportunity to sell their shares in the market, providing liquidity.
Risks involved in investing in IPOs
Investing in IPOs also involves certain risks, such as:
- High Volatility: IPOs can be highly volatile, with the price of the shares fluctuating significantly in the first few weeks of trading.
- Lack of Information: As the company is going public for the first time, there may be a lack of information available on the company’s financial performance and future prospects.
- Lack of Control: As an investor in an IPO, you have no control over the company’s management and decision-making.
Factors That Affect IPO Allotment
Subscription Ratio
The subscription ratio is one of the most critical factors that affect IPO allotment. The subscription ratio is the number of times that the shares are subscribed by investors. For example, if the IPO is subscribed 5 times, it means that investors have bid for five times the number of shares offered in the IPO. A high subscription ratio indicates strong demand for the shares, which can lead to lower allotment chances.
Investors need to keep an eye on the subscription ratio and apply accordingly. If the subscription ratio is high, investors may need to bid for a higher number of shares to increase their chances of getting allotted shares.
Bid Amount
The bid amount is the amount that an investor applies for in an IPO. A higher bid amount can increase the chances of allotment. For example, if an investor applies for 100 shares and another investor applies for 500 shares, the investor who has applied for 500 shares has a higher chance of getting allotted shares.
Investors need to be careful while applying for shares in an IPO. They should bid for the number of shares that they can afford and not exceed their investment capacity.
Categories of Investors
Different categories of investors, such as retail investors and institutional investors, have different allotment quotas. For example, in an IPO, the retail investor category may have a quota of 35%, while the institutional investor category may have a quota of 50%. The remaining quota may be reserved for high net worth individuals or employees of the company.
Investors need to understand the allotment quotas for different categories of investors and apply accordingly. Retail investors usually have a higher chance of getting allotted shares as the allotment quota for this category is relatively low.
Company Profile
The profile of the company also plays a crucial role in IPO allotment. If the company has a strong brand, a good track record, and a promising future, it is more likely to receive high demand for its shares, leading to lower allotment chances for investors.
On the other hand, if the company is relatively unknown, has a weak financial track record, or has an uncertain future, it may receive lower demand for its shares, leading to higher allotment chances for investors.
Market Conditions
Market conditions also play a crucial role in IPO allotment. If the overall market sentiment is bullish, investors are more likely to apply for shares in an IPO, leading to a high subscription ratio and lower allotment chances.
On the other hand, if the market sentiment is bearish, investors may be hesitant to invest in IPOs, leading to a low subscription ratio and higher allotment chances.
Strategies to Increase IPO Allotment Chances
Investing in an IPO can be an excellent opportunity to buy shares in a company at an early stage and potentially earn a significant return on investment. However, IPO allotment is a competitive process, and not all investors who apply for shares get allotted shares. In this article, we will discuss some strategies that investors can use to increase their IPO allotment chances.
- Apply through multiple accounts Investors can apply for shares in an IPO through multiple accounts, such as their own account, their spouse’s account, and their children’s accounts. By applying through multiple accounts, investors can increase their chances of getting allotted shares. However, investors need to ensure that they do not exceed the maximum bid amount per account set by the SEBI.
- Bid for a higher number of shares Investors can increase their IPO allotment chances by bidding for a higher number of shares. Companies usually allocate shares to investors who have bid for a higher number of shares first. Therefore, if an investor bids for a higher number of shares, they have a higher chance of getting allotted shares.
- Apply for the Retail category Companies usually allocate a certain percentage of shares to retail investors, which have lower allotment quotas compared to other categories of investors. Therefore, applying for the retail category can increase the chances of getting allotted shares. However, investors need to ensure that they meet the eligibility criteria for the retail category set by the SEBI.
- Apply for IPOs with lower demand Investors can increase their IPO allotment chances by applying for IPOs with lower demand. If the subscription ratio is low, investors have a higher chance of getting allotted shares. However, investors need to ensure that they conduct proper due diligence on the company before investing.
- Apply for IPOs with long-term growth potential Investors can increase their IPO allotment chances by applying for IPOs of companies that have long-term growth potential. If the company has a strong brand, a good track record, and a promising future, it is more likely to receive high demand for its shares, leading to lower allotment chances. On the other hand, if the company has a relatively unknown brand, has a weak financial track record, or has an uncertain future, it may receive lower demand for its shares, leading to higher allotment chances.
- Use the cut-off price Investors can use the cut-off price while bidding for shares in an IPO. The cut-off price is the highest price that an investor is willing to pay for the shares. By using the cut-off price, investors have a higher chance of getting allotted shares as companies usually allocate shares to investors who have bid at or above the cut-off price.
In conclusion, investors can increase their IPO allotment chances by applying through multiple accounts, bidding for a higher number of shares, applying for the retail category, applying for IPOs with lower demand, applying for IPOs with long-term growth potential, and using the cut-off price. However, investors need to ensure that they conduct proper due diligence on the company before investing and understand the risks involved in investing in IPOs.
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