The IPO Frenzy: A Double-Edged Sword for Investors
The excitement surrounding initial public offerings (IPOs) has reached fever pitch in the current financial year, particularly with the remarkable performances of companies like Bajaj Housing Finance and PN Gadgil Jewellers. Bajaj Housing Finance made headlines on September 16, with its stock closing at ₹165—an impressive 136% increase from its issue price of ₹70. The following day, PN Gadgil Jewellers mirrored this success, closing at ₹793, a 65% jump from its issue price of ₹480. Such stellar performances have not only captured the attention of retail investors but have also sparked a broader conversation about the implications of this IPO frenzy.
The Surge in Demand for IPOs
The demand for IPOs has been nothing short of astronomical. Bajaj Housing Finance was oversubscribed nearly 64 times, while PN Gadgil Jewellers saw an oversubscription of over 59 times. Premier Energies even surpassed this with an oversubscription of more than 74 times. According to data from the PRIME Database published in the Business Standard, the average oversubscription for IPOs in the financial year 2024-25 stands at an astonishing 48 times. This overwhelming demand is largely driven by the fear of missing out (FOMO), which has evolved into a prevalent investment strategy among retail investors.
The FOMO Phenomenon
FOMO in the context of IPOs leads to a peculiar investment behavior. When investors apply for an IPO but fail to secure an allocation due to high oversubscription, they often rush to buy shares on the listing day, propelling the stock price even higher. This creates a cycle where the fear of missing out on potential gains drives more investors to participate in future IPOs, further inflating demand. However, this trend can have detrimental effects on the market and the quality of companies entering it.
The Risks of Short-Termism
The allure of quick profits from IPOs can lead to a culture of short-termism among investors. Many individual investors tend to sell off half of their shares within a week of listing, chasing immediate gains rather than considering long-term investment strategies. This mindset fosters the belief that making money in the stock market is easy, which is misleading. Historically, wealth accumulation through investing is achieved through long-term holding and the power of compounding, not through rapid trading.
The Quality of IPOs at Stake
As the demand for IPOs continues to surge, there is a growing concern about the quality of companies entering the market. The euphoric state of the market has even allowed financially troubled companies to raise funds through follow-on public offerings (FPOs). This trend raises questions about the sustainability of such investments. When companies with questionable fundamentals are able to attract significant capital, it can lead to inflated valuations and ultimately hurt investors in the long run.
The Fallacy of Composition
The current IPO craze also illustrates what economists refer to as the fallacy of composition. While individual investors may profit from flipping shares in high-demand IPOs, this behavior can lead to broader market distortions. The increased demand for new IPOs can result in a decline in the quality of companies seeking to go public, as well as inflated issue prices. This dynamic not only affects individual investors but can also have negative repercussions for the market as a whole.
A Word of Caution
Nobel laureate Robert Shiller, in his book Irrational Exuberance, warns that IPOs often occur at the peak of investor fads and tend to experience significant price declines relative to the market in the following years. Despite this cautionary advice, the current climate of FOMO continues to dominate investor sentiment, overshadowing the potential risks involved.
Conclusion
The recent surge in IPOs and their impressive listing day performances have undoubtedly captured the imagination of retail investors. However, the underlying dynamics of FOMO, short-termism, and the potential decline in the quality of companies entering the market should serve as a cautionary tale. As investors navigate this exciting yet volatile landscape, it is crucial to remember that sustainable wealth in the stock market is built over the long term, not through fleeting gains. Understanding these principles can help investors make more informed decisions and avoid the pitfalls of the current IPO frenzy.
Disclaimer: Views and opinions expressed in the article are the author’s own and do not reflect those of Upstox.