IPO: My 2 cents to save your 2 cents

It has been an IPO frenzy year. A record 34 companies have gone public in India so far.

Why wouldn't they?

The stock market has been witnessing one of its best rallies. Retail investors stashed with extra cash, (thanks to COVID savings) are pumping cash to any prospect that paints a rosy picture to their eyes.

Adding to it, the quarterly results of a bunch of companies have been positive. Pent up customer demands and judicious management have let these companies post huge profits.

The market sentiments are optimistic, resulting in more investment and further rallies.

And this is a moment any company would choose to list itself on the stock market.

So it happens that a friend of yours invests in the IPO of some company that you have either heard or haven't. And lo behold, the stock rallies on the listing day and he makes double of his money just like that.

Now you are enticed. And you too want a piece of that pie.

Well, who wouldn't want to make some quick money?

So you turn on the news or do a simple google search and find a few IPOs that are on their way to make it big… or so you think!

You do a bit of research- maybe read a Wikipedia page or Money Control article on it or watch the stock market experts vaunt about why a particular IPO is the chosen one.

After re-visiting the same articles multiple times, satiated with your homework, you chose your lucky horse optimistic that it will win you the race

But this is where your daydreaming is broken open to the kick of crude reality.

If you have been lucky you would make your profits but unfortunately, in the stock markets just luck won't keep your boat sailing, it needs a lot more!

So what should you do? How do make sure that your boat sails towards the land of profit and not to one of doom?

Before answering the rhetoric. Let's take a small detour to mid 17th Century Netherlands

Charles de l'Écluse was a botanist who was on his visit to Ottoman Empire, the present-day Turkey. While on his visit, he came across a specimen of a beautiful flower that adorned the walls and gardens of the royal palace.

Intrigued by it, he brought these flowers to the Netherlands, to study them.

These flowers reproduce through their bulbs. So Dr Charles de l'Écluse planted them in his gardens. When the flowers bloomed in their rich and flamboyant colours, they did really catch the attention of the onlookers.

Soon enough, these flowers began to adorn the walls of the wealthier households.

The flowers didn't grow fast, it took them a full year before they blossomed. As with anything rare and exotic, these flowers also started to see an increase in valuations.

And hence, the flowers started to be sold at a premium now. This only served to catch more attention. And more people flocked to buy these flowers. People started to see it as a symbol of wealth and mindlessly threw their cash to buy them.

Meanwhile, the flowers, infected by a virus, developed new colour streaks. The public however ignorant of this bought into the vanity, valuing them even higher due to their rarity.

This led to the flowers getting even costlier. And the cycle kept looping. Soon a few sneaky tradesmen saw a business opportunity. They bought these flowers in lots and sold them to others, making fat profits in a matter of weeks. And this news spread like wildfire. Everyone wanted a piece of the pie!

Eventually, a bunch of witless neophyte traders, allured by the money dived into the market. There was too much happening to be missed out. So throwing caution to the winds, they either borrowed or put their life savings into the trade. This only served to make the flowers even more pricy

At one point in time, the prices soared so high that the buyers could no more afford it.

The sellers suddenly had run out of customers. The sellers started discounting to make some sales. And soon enough a price avalanche occurred.

The bubble had burst. The flowers lost their sheen and people lost their money

The flowers in this instance were the “Tulips” that now dot the farmlands of the Netherlands and this episode is infamously termed as “Tulipomania”

So why did we talk about this demotivating story?

Because “History repeats for those who do not learn from it”

So, the next time you venture to invest your hard-earned money into the IPOs, do your due diligence.

Don't be shepherded just because your friends, the “market experts” or the influencers prattled about it.

Unlike all the other enlisted stocks, the performance of companies that filed for IPOs is not completely public. In fact, very little is revealed about their business flow.

Hence before you invest, ask yourself how is this company different to others? Is the difference an edge over others? how does the cash flow look like? Is the company burning more money than it is earning? Are the company’s goals feasible?

Why does the company intend to go public? Does it intend to raise the money to finance its growing business or does it intend to cash out its earlier investors? What are the bottlenecks the company currently faces and how does it intend to resolve them?

Keep asking, till the answers give you the complete picture, clear of all the hype

Last but not least, invest only the amount of money that you can afford to lose. Too much greed and too much caution have done no one any good!