IPOs and stocks, both are two popular investment avenues and both offer unique opportunities and challenges. However, choosing one can be confusing. Through this blog, we aim to give you more clarity on what these options exactly are, what they can do for you, and as a beginner, which is a smarter choice.
Understanding the Basics
An IPO or an Initial Public Offering is a process by which a private company goes public by offering its shares to the general public for the very first time. The company can use this public investment to raise capital for its business operations. The shares of the company are then listed on a stock exchange from where they can be traded. You can apply for IPO online and offline.
On the other hand, stock investing is a process which involves buying and sharing shares of a company which is already public and is listed on a stock exchange. When you buy a stock of any company, it is like you are buying that small piece of the company and becoming a shareholder. The price of a stock that you bought may increase over time and give you a return on your investment.
Pros and Cons of IPO
Like every other investment option, there are pros and cons to consider. Let’s understand them one by one.
Pros
-
Potential for high returns: If the company performs well in the market, early investors are usually the ones to see the highest and the most significant returns on their investment. This especially stands true for companies that belong to high-growth industries.
-
Opportunity to invest in a unique idea or business model: Most companies in IPOs come with new ideas or more innovative business models. You get the opportunity to support these innovations by investing in their IPOs.
-
Chances of getting the ‘pop’: With limited shares and a scarcity created, there can often be a significant price rise, known as a ‘pop’ on the first day of trading. This can provide you, as an investor, with substantial gains.
Cons
-
Higher risk: Because the company is untested and completely new in the public market, the IPOs are highly risky and the future performance is uncertain. Many IPOs may also not perform well in the long term.
-
Lack of historical data: Adding to the previous point, because the companies are entering the public markets for the first time, there is no track record of financial performance on the stock market, which makes it difficult to predict the performance in the future.
-
Overvaluation: There is a strong possibility that an IPO can stir a big hype in the market, which can lead to the company being overvalued, in which case, the stock prices take a heavy drop.
Pros and Cons of Investing in Stocks
Let’s get into the pros and cons of stock investing
Pros
-
Access to established companies: There is a wide range of successful and established companies for you to choose from when investing in stocks.
-
Dividends: Many companies give their shareholders dividends, which is a portion of their annual earnings. This acts as a regular stream of income for the shareholders.
-
Historical data: Unlike IPOs, established companies come with their historical data which allows you to study the performance over the past couple of years and give you scope to predict future performance and then invest.
Cons
-
Market Volatility: Stock prices fluctuate widely in the short term due to factors like economic news, reports on earnings and changes in the market emotions.
-
Potential for losses: Like IPOs, underperformance is a disadvantage that even stock investing has where the companies can either underperform or go bankrupt and you lose all or part of your investment.
-
Research and knowledge: While the concept of stock investing is easier and less risky than an IPO, it requires an equal amount of research and knowledge of the company and the market conditions.
Stock investing and IPOs both have their risks. It requires research, patience and emotional resilience and hence, all of these factors need to be considered before venturing into stock investing.
Conclusion
Starting an investment, be it IPOs or stocks can be a rewarding but complex and difficult process. As an investor, there are a lot of variables that you need to understand before you go ahead and invest in any IPO or stock. To invest in stocks online, open an account with Dhan.
HedgeThink.com is the fund industry’s leading news, research and analysis source for individual and institutional accredited investors and professionals
