Now suppose you manage to receive an allotment for your IPOs. The issuing price was ₹500; however, at the time of listing, the share was listed at ₹650. You have made a profit of 30%. Just after a few days, the share falls to ₹580 and a week later to ₹500 again.

Why did that happen?

The listing of a stock does not always lead to an upward trend. The euphoria that creates a high listing price can go away very soon and after that, investors tend to concentrate on the valuation and growth potential of the business.

The Excitement of Listing Day Could Be Short-lived

Obviously, a newly listed stock will get plenty of investor attention. Those who could not purchase shares at the allotment stage might want to do so once the stock starts trading on the market, while existing shareholders might get excited about the future of the company. As a result, the share price could soar above its issue level. But excitement is not always long-lasting. Once the first burst of excitement fades away, investors will likely wonder whether the stock deserves such high valuation. If there is no clear answer, the demand for the stock may ease and the share price could lose some ground.

Profit Taking May Boost Selling Pressures

Among the easiest reasons for a disappearance of listings profits is profit taking. For example, assume that the initial public offering was offered at ₹500 but listed at ₹650. The people who got allotments have made a profit of ₹150 per share at the time of listing. Many may wish to sell immediately and take their profits. In case this happens to be true with many other people, selling pressure may become very high and the stock may not be able to maintain its listing price.

Possibility of Overvaluation Post-listing

However, a premium listing does not always translate into a fair valuation of the stock. In some cases, the market price might be significantly higher than the issue price owing to high demand. However, post listing, the valuations of the company could be compared with their earnings as well as other companies in the same segment. A company that sells their stocks at ₹600 and list them at ₹800 may seem like a good one. However, if the investors do not find the company’s earnings worthy of such a valuation, the stocks would soon lose their value even without the company becoming bad in any way. The rise in price cannot be taken to mean the increase in value by the same measure.

Investors Shift Their Focus From IPO to Business

Prior to the listing, there might be a lot of discussion concerning the subscription numbers, profits from listing and the story of growth of the company. Investors may start looking at:

• Revenue and profit growth
• Profit margins
• Debt levels
• Cash flow
• Competitive position
• Industry conditions
• Future growth prospects
• Valuation compared with peers

In case the company does not perform financially as expected due to the hype created during the IPO process, the value of the stock can be affected negatively. It is for this reason that one should never base their opinion of an IPO on its hype.

Selling Pressure from Short-Term Investors

It is important to note that not all IPO investors have the same goal in mind. Some will wish to keep the stock for the long haul. Others might just be interested in earning some money through the listing of the stock. In case of a high listing, short-term investors will offload the stocks. This could create a scenario whereby initial selling will put pressure on the stock price, thereby prompting other investors to make profits as well.

Market Conditions Can Change

It’s important to note that an IPO doesn’t exist in a vacuum. The market conditions could be favorable during the subscription period, but when the shares go on listing, the market might not be favorable anymore. An adjustment in the market, interest rate expectation changes, geopolitical factors or bad news about the industry can easily affect the sentiment of the investor. The company may not have any changes in business performance, but the sentiment among investors about the value of the stock will certainly affect the pricing.

Issue Price Not the Determined True Value of the Stock

The next common error that investors often make is considering the IPO issue price to be the stock’s true value. Assume that the firm is valued at ₹700 after the issue price was ₹500. The drop in value to ₹600 will lead to thinking, “The price has not yet gone below the issue price; therefore, it should do well.”
However, what really matters is whether the current price of the stock can be justified in terms of its earnings, growth potential, finances, etc. Conversely, the drop in the stock price below the issue price does not always imply that the company is not a good investment.

Don’t Assume a Previous High Will Come Back

When an IPO falls after listing, investors often anchor themselves to its highest price. For example:
Issue price – ₹500
Listing price – ₹650
Peak – ₹720
Current price – ₹580

An investor might think, “It has to go back to ₹720.” But no such guarantee exists. The high point before was what the market was willing to pay for the shares at that time. If the expectations have now changed, it is unlikely to recover to that level. Instead of wondering if the share price can go back to its previous high point, consider if the price level is a good one based on the current valuation of the business.

What Should Be Done Post Listing?

There’s no question that selling is not the only option if the stock has fallen post-listing. Likewise, buying the stock because it is listed at a premium is also not the correct course of action. First, look back at why you chose to buy the stock in the first place. Were you bullish on the growth story of the company? If yes, then that should not change. More importantly, don’t let the listing price cloud your judgment about the stock.

Don’t Mistake a Good Listing Performance for a Good Investment

Some IPOs lose their listing performance after days, as the reason behind the initial surge, such as strong demand, market hype and expectations of short-term gains, can quickly fade away. Book profits, overvalued stocks, changing market sentiment and scrutiny of the underlying fundamentals can all lead to downward pressure on the newly listed stock.

Rather than concentrating merely on the listing gain that an IPO makes, it is important to analyze the reasons behind that listing gain. While a premium listing is certainly exciting, it is important to see whether the business performance of the company, along with its valuation, can sustain the price level in the market.

For more market insights, trading resources and information to help you stay informed and make more considered decisions, explore Aetram.

FAQs

1. Why do IPO listing gains disappear so quickly?
   Listing gains can disappear due to profit booking, high valuations, short-term investor selling, changing market sentiment and concerns about the company’s fundamentals.
2. Does a premium listing mean an IPO is a good investment?
   No. A premium listing only shows that buyers were willing to pay more than the issue price at that point. It doesn’t guarantee strong long-term performance.
3. Why do investors sell shares immediately after an IPO listing?
   Some investors apply for IPOs mainly to earn listing gains. If the stock lists at a premium, they may sell their shares and lock in their profits.
4. Can an IPO fall below its issue price after listing at a premium?
   Yes. If selling pressure increases or investors reassess the company’s valuation and prospects, the stock can lose its initial gains and potentially trade below its issue price.
5. Should investors hold an IPO after listing?
   It depends on the investment objective. Investors should reassess the company’s fundamentals, valuation, growth prospects and risks rather than making the decision based only on its listing performance.