IPO - Investing or Trading !?

Why IPOs Are Not the Golden Ticket You Think They Are

Introduction

The IPO frenzy is real, and it’s hard to avoid the excitement. Every day, it seems like there’s a new "must-invest" company going public, and the media, along with finfluencers, keep pushing the idea that it’s a once-in-a-lifetime opportunity. But is it really? Let’s take a closer look into why IPOs may not be the golden ticket many believe them to be, and who really stands to gain from the frenzy.

IPOs: A Closer Look at the Hype

It’s no secret that IPOs often come during market booms, when investor confidence is high, and everyone wants to cash in on the next big thing. But behind the scenes, the real beneficiaries are not the retail investors—they are the promoters, early investors, and merchant bankers. These players are incentivized to push IPOs at the highest possible valuations, regardless of the long-term prospects for ordinary investors.

Here’s the paradox: the people who know the company best (promoters and early investors) are cashing out at premium prices while new investors are buying in at the top.

Let’s break down the incentives:

• Promoters: The company’s promoters (often founders or controlling shareholders) use the IPO to sell a significant portion of their stake at the best possible price. They aim to lock in maximum gains, often at lofty valuations that don’t always reflect the company's true worth. Once the IPO is over, they’ve taken their profit, and it's the new investors who are left to ride the highs and lows of the stock’s performance.

• Early Investors (VCs, Private Equity, etc.): Early-stage investors, such as venture capitalists and private equity firms, use the IPO as an exit strategy, cashing out at premium prices that they wouldn’t get from private market transactions. They’ve likely entered at much lower valuations and are now benefiting from the inflated hype surrounding the IPO, leaving retail investors to buy at what could be an overvalued price.

• Merchant Bankers: The merchant bankers responsible for taking the company public get paid hefty fees based on the amount of money they help raise. Their primary goal? To sell the IPO at the highest possible price, because their compensation is often linked to the size of the offering. This can lead to inflated valuations that benefit the insiders but leave new investors at risk when the market reality sets in.

  
  

So while IPOs can deliver a quick profit for a lucky few, more often than not, the price comes crashing down once the initial hype fades, leaving retail investors to deal with the fallout.

Why the Media and Finfluencers Fuel the Frenzy

IPOs are a goldmine for media outlets—they generate clicks, viewership, and advertising revenue. IPO headlines are full of oversubscription stories, how many crores were raised, and the "can’t-miss" opportunities. But what the media doesn’t tell you are the IPOs that flop, the ones that leave investors stuck with falling stock prices. Why? Because bad news doesn’t sell as well.

• Finfluencers:

  Finfluencers are another group that profits from the IPO hype. These individuals create videos, blogs, and social media posts that analyze and promote the latest IPOs. While some provide solid insights, many ride the wave of excitement, because hyped-up IPO content generates eyeballs and engagement, which in turn fuels their ad revenue or partnerships. Unfortunately, the attention-grabbing content often glosses over the risks, making it seem like a "can't-miss" opportunity.

  
  

This constant media and social media push creates FOMO (Fear of Missing Out)—the idea that if you don’t invest, you’re missing out on a big opportunity. But in reality, the frenzy serves everyone but you—the promoters, early investors, merchant bankers, and media all get their cut, while you’re left holding the bag if things go south.

The Small Allotment Dilemma

In a heavily oversubscribed IPO, which is common during IPO frenzies, retail investors often get only a tiny fraction of the shares they apply for. Even if the stock price shoots up, the profits are limited by this small allotment.

For example, you might apply for a large chunk of shares, but only get a few. Even if the stock rises by 20-30% on listing day, the gains are marginal due to the small number of shares you’ve been allotted. Meanwhile, the big players—promoters, early investors, and institutional investors—reap the larger profits because they’re selling significant portions of their holdings.

What Happens When the Market Turns

When the market cools off or corrects, many IPOs that were once hyped up experience steep drops. Investors who bought in at inflated prices are left holding shares that are stuck in red territory. In fact, some IPO stocks drop below their issue price and remain there for extended periods, trapping investors in what could be a loss-making investment.

In some cases, the shares remain below their listing price for months, even years, as the initial excitement dies down and market reality kicks in. During these times, the media, which once promoted the IPO so heavily, shifts focus to the next big thing, leaving retail investors stuck with depreciating stocks.

Long-Term Investing: A More Reliable Strategy

So, what should you do instead? The answer is simple: focus on long-term investing in companies with a solid track record and proven fundamentals. The stock market offers thousands of companies that may not have the excitement of a new IPO but can deliver sustainable returns over time.

When you invest in well-established businesses with strong growth prospects, you benefit from consistent performance rather than speculative bubbles that burst as quickly as they rise. The reality is, the biggest returns in the market come from patience and discipline—not by chasing hype or speculation.

Conclusion: IPOs—Excitement or Risk?

The IPO frenzy can be alluring, but it’s important to separate excitement from sound investment strategy. While some IPOs do offer quick returns, many end up disappointing, especially for those who buy into the hype without fully understanding the risks.

The real winners in most IPOs are promoters, who sell their stakes at high prices; early investors, who exit at a premium; merchant bankers, who pocket fees; and finfluencers, who generate views and ad revenue. The retail investor, meanwhile, is often left holding overvalued shares that may struggle to perform in the long run.

As a savvy investor, the key is to avoid getting swept up by media narratives and finfluencer promotions. Instead, focus on what truly builds wealth over time: disciplined, long-term investing in quality companies or mutual funds, guided by experienced professional.