Do All Stocks on the First Day of Their IPO Go Up in Value?

Investing in an IPO can be a tantalizing prospect, but it requires thorough research and understanding of the market. Beginners often face challenges in assessing the potential of a newly listed company, making it challenging to predict its stock value on the first day of its Initial Public Offering (IPO).

Investing as a Beginner

For those new to stock market investing, it's crucial to understand that not all stocks listed on their first day of IPO experience a surge in value. An individual's proficiency in the financial markets and industry sectors significantly impacts their ability to make informed investment decisions. Therefore, it is best to wait for the right time to invest as a beginner rather than rushing into the IPO market.

Key Considerations for IPOs

However, if you have been trading and investing in the stock market for a long time, buying IPOs can be a strategic choice. Before purchasing an IPO, consider the following steps:

Understand the Business and Management: Make an effort to understand the business model and management functions of the company. Research their operational history to gain insight and form an opinion. Note IPO Proceeds: Take note of the IPO proceeds and understand the purpose of the public offering. This can provide valuable context about the company's intentions. Compare with Industry Peers: Ensure to compare the prices of similar companies in the industry to check their accountability and relative value. Consider Timing: If the share price is deemed overvalued, consider purchasing it later to potentially achieve good returns.

Despite these considerations, most IPOs do tend to see significant value increases on their first opening day. This is often due to the periods of limited supply on the first day of listing. Companies typically give investors three days to invest, and on the fourth day, the share price is released. For instance, the IPO of Burger King surged by 80-90% on its first day and experienced a 20% circuit breaker for three days.

Empirical Evidence from Recent IPOs

While some IPOs do experience remarkable increases in value, not all do. Companies with strong business models and revenue growth tend to attract more interest, leading to a boost in their stock prices. However, as seen from past IPO data, not all IPOs perform well, even on their first day.

Historical IPO Statistics

Let's take a look at the IPO data from the past two years to illustrate this point:

2017: Out of 36 stocks listed on the exchange, 17 are trading below their issue price. Notable IPOs include DMART, HDFCLIFE, SBILIFE, ICICI Lombard CDSL, and BSE LTD. 2018: Out of 25 stocks listed, 12 are trading below their issue price. Notable IPOs include HDFCAMC, RITES, ICICISECURITIES, and BANDHAN BANK HAL LTD. 2019: Up to the current listing, only 1 out of 13 stocks is trading below its issue price. Notable IPOs include IRCTC, POLYCAB, and INDIA MART.

These statistics highlight the importance of thorough research and analysis. The success of an IPO depends not only on marketing efforts but also on the popularity of the brand among retail investors. Institutional investors and Qualified Institutional Buyers (QIBs) conduct a detailed examination of the company's financial statements before making their investment decisions.

Conclusion

While many IPOs experience a sharp rise on their first day, it is not a universal phenomenon. For investors, especially beginners, waiting for the right time to invest can be a prudent strategy. Additionally, understanding the business, comparing with industry peers, and monitoring market conditions are critical steps in making informed investment decisions.

For those looking to stay updated and informed about IPOs, websites like BloombergQuint and Moneycontrol are valuable resources for analyzing companies and their financials.