In 2021, 63 Indian companies collected Rs. 1.19 trillion through initial public offerings (IPOs), with most companies reporting positive returns on their IPOs.
Analysts say inflated valuations and a lack of solid fundamentals are to blame for a few listed corporations with negative or flat results. For investors, this resulted in significant losses. The growing number of IPOs has accelerated in the Indian capital markets in the past few years. A new list of companies is being added to the public space regularly. However, not every person gets an allotment in the IPO.
Thus, they are always looking for new ways to invest in these companies and improve their earnings. Here, IPO-bound stocks in the unlisted equity markets come into the picture. These are stocks in the unlisted equity markets which are soon going to come with an IPO.
Why are IPO-bound stocks in the unlisted equity market more popular?
A few reasons why IPO-bound stocks in the unlisted equity market are more popular are:
1. No certainty of getting allotment in the IPO
The fact that there is no assurance of securing an allotment in the IPO issue is one of the key reasons why IPO-bound companies in the unlisted equity market are growing more popular. As a result, money is pouring into unlisted markets.
The IPO is usually oversubscribed, making it difficult to obtain an allocation. As a result, investors interested in these companies turn to unlisted equity markets to buy IPO-bound stocks. Some investors buy IPO shares ahead of time to avoid disappointment. Investors may use unlisted markets to purchase a firm’s shares in the early stages of preparing for an IPO.
2. To find potential multi-baggers early
The value of unlisted shares that are being held back from the market has increased in recent times, as investors are hoping to make a profit from the shares later.
The potential long-term investors see in these companies would mean that when the company is finally listed on the stock market, these investors would be able to make a handsome profit. In other words, investors want to purchase stocks at cheaper valuations and then sell them at a higher price to make profits. The objective is to catch possible multi-baggers early and at a lower price.
3. To take part in a company’s growth
Pre-IPO investing allows an investor to engage in a company’s growth before it is publicly listed. When a company is listed, investors profit because there is the potential for value unleashing and possible benefits in a successful company. There is also the assurance of investing in a company that may see substantial IPO demand.
Unlisted stock investment is a high-risk investment with the potential for much larger profits because initial investors gain the most before the firm is listed on the stock exchange.
4. Higher returns
Investors are flocking to the unlisted market to buy shares of IPO-bound corporations in the hopes of making a profit. Investors flock to the unlisted market as benchmark indexes reach new all-time peaks, and several IPOs have struggled to provide investors with adequate listing returns.
Factors to consider before investing in IPO-bound stocks
When choosing an IPO-bound stock to invest in, it is crucial to grasp the business model and management staff, review the financial report for financial position and business updates, and comprehend the valuation based on current market prices.
1. Evaluate the business
Evaluating the potential of a business is a crucial step before investing. Amateur investors often underrate the complexity and risk in assessing a business, but they can be the deciding factor in whether to invest or not.
When evaluating a business, consider how the company will make money, its core competencies, its competitive environment, strengths and weaknesses, value proposition, operational efficiency, and financial health.
An investor needs to conduct thorough and in-depth research before committing to investing in a company. This research will help the investor determine if the business is on a steady and predictable course. If a business is not stable and predictable, this could lead to financial loss for the investor. An investor needs to evaluate a business before investing in it because an evaluation will determine if the company is worth putting money into.
2. Evaluate the financials
Evaluating a company’s financial health helps a person make better business decisions. When they assess the financial statements, they can understand how a company makes money and whether its current strategy is sustainable. The financial health of a corporation reveals its effectiveness, efficiency, and prospects.
Profit margins, revenue growth, expenses, and several applicable ratios are examples of broad financial measurements.
3. Valuation of the company
Comparing pertinent ratios with those of peer firms operating in the same industry that are already publicly traded while making modifications for the company’s particular context is a smart place to start. Price to Sales & Price to Earnings are two of the most used valuation indicators. Every corporation is different, so there is no reason to suppose that a company with a lower valuation ratio than its rivals is more desirable. An assessment of this ratio can be used to determine how the company positions its value in comparison to its peers, and it can be determined whether the unique character of the business supports the discrepancy.
How to buy pre-IPO shares?
Individual investors can now participate and invest in unlisted stock markets, which were previously exclusively available to large institutions and funds. Unlisted shares can be purchased through intermediaries and platforms that engage in the procurement and placement of unlisted shares and can help with the transaction. Intermediaries and platforms buy stock from employees (ESOP), existing investors, and new investors. Privately held shares can be purchased through a Demat account, and the transaction is off-market (not on the exchange). To avoid counter-party risk, it is critical to engage with reputable/trustworthy intermediaries.
Stocks unlisted on the stock exchange are known as unlisted shares. The risk of investing in listed shares is lower because the SEBI regulates the stock market properly, and market pricing and disclosures are transparent. In the unlisted space, transparency and regulation are not available.
Thus, investors need to conduct due research before deciding on this market. Further, investors need to consider their risk profile. Many intermediaries are pushing these assets since the commission rates are so high. So, in cooperation with their financial advisor, they need to make informed decisions based on thorough research. Only experienced investors with a deep understanding of a company’s fundamentals can consider investing in the unlisted market. This category is like a minefield; investing in this industry is hazardous unless investors exercise extraordinary caution.
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