IPOs or stocks: Where to invest? Returns, risks, allotment of shares

Find out more about investments in IPO and stocks, and which one suits your financial goals.

IPOs or stocks – Which one is better for you?

Initial Public Offering (IPO) and stock market are the two options where a common equity investor can trade in. IPO allotment has a detailed procedure that needs to be followed if one wishes to buy shares through the IPO route. The stock market is comparatively simpler, as shares can be easily bought and sold in it.

IPOs

At the time of a new stock issuance, private companies open their shares to the public for the first time. This process is called IPO. These companies, old or new, choose to get listed in the stock exchange. With an IPO the private companies become public listed companies. Before the IPO, a private company usually has a limited number of shareholders and early investors, such as family, friends and the founder(s). 

IPO shares are allocated in three categories:

  • Qualified Institutional Buyers 
  • Non-Institutional Investors
  • Retail Individual Investors

Stocks

Stocks, also known as equities, offer a stake in the ownership of a company. One share represents the ownership of a fractional unit of a company. For the right amount, buying shares is a convenient and popular way of investment for retail as well as institutional investors.

Related: Stock options trading: What every stock investor should know about?

Primary and secondary market

In India, share markets are of two types: Primary and Secondary. In case of an IPO, shares can be bought directly from the private companies that raise their capital through it. In the case of stock, securities that are sold in the primary market i.e., IPO, are traded in stock exchanges. Anyone can buy or sell stocks on public exchanges. This secondary market is a meeting place of buyers and sellers of stocks.

Allotment

An individual investor is allowed to invest up to Rs 2 lakh in an IPO. The total demand for shares is estimated by the number of applications received. High net worth individuals, companies, trusts etc. can apply for shares that exceed this Rs 2 lakh limit. A full allotment of shares is made if the demand is less than or equal to the number of shares. In stock trading, shares are sold to the buyer if the price quoted meets the price offered by interested buyers. The amount of buying is based on the amount available to the buyer.

Related: ASBA and IPOs: All you need to know

Oversubscription

In case of oversubscription, the demand for shares is greater than the shares available for allocation. Here, no application is allotted more than one lot, ensuring that every applicant has a fair chance of allotment. Pro-rata allotment becomes applicable in these cases. If the number of retail investors exceeds the number of shares available, allotment is made based on an automated lottery. There is no concept of oversubscription in the secondary market. 

Returns

In an IPO, shares are first pledged to the investors of the primary market and then listed on the stock exchange, thereby making their way to the secondary market. The listing price of the IPO shares is where applicants can make a profit or loss. Allotted shares can also be held for the long term with sustained return in mind. 

Stocks, on the other hand, are already listed. As you buy a stock from the company, and it earns profits, you get a share of it. Conversely, your returns are at stake if the company underachieves. The worst part is if the company goes bankrupt, because your shares may become valueless. 

Related: What to keep in mind when investing in an IPO?

Risk

When the funds of the company become insufficient during the stage of expansion, it introduces the IPO. So, when you invest, the company will get funding. However, some risk is involved here. If the company does not run smoothly, there is a chance that the investors will sustain losses.

Stocks are of companies that are already listed on the stock exchange. You can look at their past performance in the share market, which gives additional assurance. Further, you can monitor the performance of your shares in real-time. Investors have enough knowledge regarding the company’s business and management plans or other strategies, so less risk is involved compared to an IPO.

Related: How attractive market conditions have led to the best start to IPOs in 20 years

Last words

Individual investors and new investors can use stocks and IPOs for their specific benefits. IPOs are not a regular phenomenon, while stocks can be traded every working day. For someone looking to make listing gains, or invest in the long-term promise of a newly listed company, IPO is a good option, though it comes with risks. 

On the other hand, your stock portfolio can be monitored and adjusted daily, and you can make intraday gains as well as achieve long-term growth through shares. In both options, it is recommended that you do detailed research to gain an understanding of the company, the industry, market conditions, and the economy in general.

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