The stock market buzzword in 2021 is investing in IPOs. The Indian stock market has seen about 75 in 2021, and more are set to hit the market.
The PayTM fiasco brings focus on investor awareness and investor mindset. There may be other reasons like reducing liquidity in the markets. Let us evaluate the investor mindset, when they put their money on new companies. These companies are yet to prove their business acumen and worth.
FEAR OF MISSING OUT (FOMO)
Social media and other discussions move around the next big opportunity in stock markets.
You may apply, but not receive allotment. You receive an allotment, but the profits you make on listing are low to moderate. What happens if you do not invest, and then see others reap huge profits? They exit after listing, or build wealth in the long term. Is that too painful to digest?
IPO FINANCING OPTIONS OFFERED BY BANKS AND NBFCs
Investing is an easy game with IPO financing. It puts less money at stake for longer periods. It is then a game of chance played with borrowed money. One can spread money over a larger number of IPOs.
Banks and NBFCs offer short-term loans of 6-8 days for investing in IPOs. The investor needs to bring in 40%-50% of the total amount as margin, and pay interest at the rate of 8%-15% p.a.
If the shares are not allotted, the investor receives a refund and repays the loan with interest. In case shares are allocated but partially, the investor still has to pay interest on the entire amount.
What investors find attractive is to receive allocation, sell the shares within 1-2 days of listing (if listing happens at a higher price) and book the profits. It is called leveraging.
RBI proposes to cap the IPO financing amount to Rs. 1 crore per investor from 2022.
INVESTORS’ BELIEF IN THE FUTURE
Technology is the way to go. The companies considered hot right now are not pure tech companies, but those who use technology to onboard new customers. However, tech cuts across geographical barriers of customer acquisition.
Investors believe in the potential of new age ideas such as metaverse, fintech, blockchain, emerging trends in transport and real estate and are willing to bet on it.
They overlook the fact that the companies are presently incurring losses. It happened in the case of Zomato. Listing on bourses is an exit route for investors. Promoters offload losses on retail investors.
FOLLOWING VENTURE CAPITALISTS
If Ant, Softbank, Berkshire Hathaway, Tatas, Nilekani or Narayan Murthy find an idea worthwhile to put their money on, there must be something good about it.
Blue chip prices are now at a standstill, after having delivered profits in the past. The share price of companies which have proved their worth may be too high to enter.
Needless to say, investors look for fresh ventures with a promise of future growth, to be a part of their portfolio.
People managed to save money during the lockdown, due to lack of outward movement. Interest rates being at an all-time low, cryptocurrency and stock markets appear to be the only lucrative investment options.
Can anyone invest in an IPO? The answer is a resounding yes for anyone above 18 years of age. Gen Z has entered the markets to make a quick buck, and build an emergency fund before they launch themselves on new ventures. Investing apps are around to facilitate their entry in the market.
No wonder retail and institutional investor wealth is directed at these channels.
STARTUP VALUATIONS MATTER WHILE INVESTING IN IPOs
If a company has not started making profits as yet, potential investors are impressed by valuations.
Valuations display potential of a company to grow.