When to Say Yes to an IPO

When the stock market is on fire, everybody seems to be making money on IPOs. You buy an IPO for a simple reason: you get it cheaper. Often, companies come out with a cheaper issue price. An issue price is the price at which you can buy a share when you apply for an IPO. When the shares are listed on the stock exchange and are available for trading, the price generally rises.

Take, for example, the Jet Airways IPO. It had an issue price of Rs 1,100 per share. On March 14, 2005, the day it was listed and made available for trading, the price rose to a high of Rs 1,339. In just a few weeks, you would have made a profit of more than Rs 200 per share.

So, besides getting the shares cheaper, those who want to make a quick buck sell it soon after it is listed. Within a short span of a few weeks, they make a neat profit.

This is the reason why investors flock to IPOs.

It is not mandatory that the price of the stock rises on listing. There could be instances where it does not. Much depends on the timing of your sale. The price may rise on listing, but you may hold on for just a few days longer and it could slump. Those who invested in the Jet Airways IPO at Rs 1,100 per share were thrilled as the share price kept rising. Soon after listing (as we mentioned above), the price rose. On March 14, 2005, it was Rs 1,339 per share and rose to Rs 1,361 per share on June 1, 2005. However, after that, it has generally been going downhill. On December 6, 2005 it touched Rs 1,269; on January 6, 2006, it was Rs 1,148. On February 3, 2006, it was Rs 983.Those who did not sell at the initial levels would be rather dismayed.

The best reason to invest in an IPO is because you believe in the company and are willing to hold on to the shares for the long term. Often, companies that are going public offer their shares cheap and go on to become very successful. An IPO thus offer investors the chance to participate in the company's potential prosperity.While the chief attraction may be making a profit the moment the price of the share rises, don't let it be the only one.