By Santosh Kumar Initial Public Offerings (IPOs) and stocks both can provide opportunities to investors to invest in companies and potentially earn returns, but they involve different processes, risks and investment considerations.
An IPO allows investors to purchase shares when a company offers them to the public for the first time. Stocks, on the other hand, are shares that are already listed and traded on a stock exchange.
So, the right choice depends on the company’s fundamentals, valuation, investor’s risk tolerance, investment horizon and financial objectives.
What Is an IPO?
IPO stands for Initial Public Offering. It is the process through which a private company offers its shares to the public and becomes listed on a stock exchange.
Before an IPO, the company’s shares are generally held by founders, promoters, private investors and other existing shareholders. During an IPO, eligible investors can apply for shares according to the offer terms.
After the IPO is completed and the shares are listed, investors can buy and sell the shares through the stock exchange, just like other listed stocks.
An IPO can therefore be viewed as the entry point of a company’s shares into the public market.
What Are Stocks?
Stocks are shares representing ownership in a company. Once a company is listed on a stock exchange, its shares can generally be traded among investors in the secondary market.
Investors can buy stocks through their trading and demat accounts during market hours, subject to applicable exchange and broker rules.
The stock’s price changes based on factors such as company performance, earnings, economic conditions, investor expectations, interest rates and market sentiment.
Unlike an IPO, investors buying an already-listed stock can examine the company’s historical financial performance and trading history.
IPO Vs Stocks: Key Differences
The major difference is when and how investors purchase the shares.
| Factor | IPO | Existing Stocks |
|---|---|---|
| Meaning | Public offering of shares by a company | Shares already trading on an exchange |
| Purchase stage | Before or during initial listing | After listing |
| Price | IPO price determined through the offering process | Market-determined price |
| Company track record | May be limited as a listed company | Usually more market history available |
| Allocation | Shares may be allotted depending on demand and rules | Investors buy available shares in the market |
| Research | Prospectus and company fundamentals are important | Financial history, valuation and market data available |
| Listing gain | Possible but not guaranteed | Not applicable in the same IPO sense |
| Liquidity | Depends on listing and demand | Depends on stock liquidity |
How Does an IPO Work?
An IPO involves several stages.
First, a company decides to raise capital from the public and prepares the necessary offer documents. The issue details include information about the business, financial performance, risks, promoters and the proposed use of funds.
The company then offers shares to eligible investors during the IPO period.
Investors submit applications according to the applicable process. If demand exceeds the number of shares available in a category, investors may not receive the full quantity they applied for.
After the allotment process, the company’s shares are listed on the stock exchange and begin trading in the secondary market.
From that point onward, investors can generally buy and sell the shares at market-determined prices.
IPOs Can Offer Listing Gains
One reason IPOs attract investors is the possibility of listing gains.
If a company’s shares are listed at a price higher than the IPO issue price, investors who received an allotment may potentially earn a profit by selling after listing.
However, listing gains are not guaranteed.
A stock can list at a price below its IPO issue price if market sentiment is weak or investors believe the company’s valuation is too high.
Therefore, investors should not apply for an IPO solely because they expect a quick listing profit.
Existing Stocks Provide More Market Information
One advantage of investing in established listed stocks is the availability of historical market information.
Investors can generally examine:
- Historical share prices
- Quarterly and annual results
- Revenue and profit growth
- Debt levels
- Dividend history
- Valuation ratios
- Promoter and institutional holdings
- Corporate announcements
- Industry performance
This information can make it easier to evaluate an established listed company.
An IPO may also provide extensive information through its offer documents, but investors may have less public-market trading history to analyse.
IPO Vs Stocks: Which Is Riskier?
Both can be risky, but the risks are different.
IPO investors may face uncertainty about how the market will value the company after listing. The stock may experience significant volatility during the initial trading period.
Some IPOs are from relatively new or rapidly growing businesses, making it important to understand the company’s business model and financial risks.
Investing in established stocks also carries market risk and company-specific risk. A well-known company can still experience falling profits, increased competition or declining share prices.
Therefore, being a large or established company does not make a stock risk-free, and being an IPO does not automatically make an investment risky.
What Should You Check Before Investing in an IPO?
Investors should avoid evaluating an IPO only by looking at its expected listing price.
Important factors include:
Business Model
Understand how the company makes money and whether its business model is sustainable.
Revenue and Profit Growth
Examine whether the company’s revenue and profits have grown consistently and understand the reasons behind that growth.
Debt
High debt can create financial pressure, particularly when interest rates rise or cash flows weaken.
IPO Valuation
Compare the company’s valuation with similar listed companies. A good company can still be an unattractive investment if its IPO is priced excessively.
Use of IPO Proceeds
Check how the company plans to use the money raised. Funds may be used for expansion, debt repayment, working capital or other purposes.
Risks
Read the risk factors and other important information in the offer documents before investing.
What Should You Check Before Buying Stocks?
For an already-listed stock, investors can consider:
- Revenue and profit growth
- Earnings per share
- Debt-to-equity levels
- Cash flow
- Return ratios
- Valuation
- Competitive position
- Management quality
- Industry outlook
- Dividend history
- Future growth opportunities
Investors should also consider whether the current market price reasonably reflects the company’s future prospects.
IPO Vs Stocks: Which Is Better for Beginners?
For many beginners, established listed stocks may be easier to analyse because there is more historical financial and market information available.
However, beginners should not start buying individual stocks without understanding basic investment concepts.
IPOs can be attractive because they offer an opportunity to invest in a company at the time of its market debut, but evaluating a new issue requires careful analysis of its offer documents, valuation and business prospects.
A beginner should not assume that an IPO is automatically a good investment simply because it is heavily subscribed.
Can You Invest in Both IPOs and Stocks?
Yes. Investors can participate in IPOs while also investing in existing listed stocks.
An investor might choose IPOs selectively when they find a company with strong fundamentals and reasonable valuation. At the same time, they can build a diversified portfolio of established companies.
The important point is to avoid concentrating too much money in one IPO or one stock.
Diversification across companies and sectors can help reduce company-specific risk, although it cannot eliminate investment losses.
IPO Vs Stocks: Which Is Better for Long-Term Investment?
For long-term investors, the question should not be whether an investment is an IPO or an existing stock.
An IPO can become an excellent long-term investment if the underlying business performs well and the purchase valuation is reasonable.
Similarly, an established listed company can generate strong long-term returns if its earnings and business value grow over time.
The investment’s future performance ultimately depends much more on the underlying business and valuation than simply on whether the shares were purchased during an IPO.
Final Thoughts
The IPO vs stocks debate does not have a single winner.
IPOs provide investors with an opportunity to participate in a company’s public-market debut, but they come with uncertainty regarding valuation, allotment and post-listing performance. Existing stocks provide greater trading history and more information for investors to analyse, but they can also experience substantial volatility and losses.
For investors, the best approach is to focus on business fundamentals, valuation, growth prospects, financial health and risk rather than investing simply because an IPO is popular or a stock has recently performed well.
Before investing in any IPO or stock, understand the investment thoroughly and consider whether it fits your financial goals, risk tolerance and investment horizon.