How many of you have applied for an IPO in the last 3 months?
Almost every new investor is eager to grow their money through IPOs and you might have tried your luck as well by applying for one or the other IPO. But are you really investing in IPO wisely?
According to the latest SEBI report, around 50% of retail investors exit their IPO positions within one week of listing. This means that every 1 in 2 investors doesn’t hold their IPO shares for more than a week.
Then how come it could be called an investment? Weren’t those investors speculating?
But the story doesn’t end here. Digging deeper into the report reveals some surprising data points that highlight a clear deviation from the typical objectives of retail investors.
What do the Exit Patterns of Retail Investors Reveal About the Market Trend?
According to the research report around 144 IPOs were issued between April 2021 to December 2023 and in those 144 IPOs around 31.9% of shares were allotted to retail investors.
However, seeing the trend, it was observed that 50.2% of total shares allotted to retail investors were sold within a week.
Now this exit percentage depends upon many parameters:
- Returns generated within a week.
- Types of Issue
- Subscription rate
But what part of the report draws attention to is the buying and selling behavior of different categories of investors investing in IPO.
Let’s understand this trend one by one and get into the details of how the trend of retail investors in IPO investment has changed over time and what they are missing out on by following the crowd.
Individual Investors Exit 68% of Allotted Shares Within a Week When Returns Exceed 20%
Some surprising numbers emerged from the data. When an IPO provided good listing gains of 20% or more, retail investors tended to exit within a week.
Conversely, when an IPO showed a negative listing price, the percentage of retail investors exiting their shares was only 17.9%.
Now this raised multiple questions, are retail investors just trying their luck with IPOs? Because, if they had conducted proper research and analysis and found the company’s financials strong, holding the shares could have yielded better returns.
On the other hand, they hold shares of IPO that didn’t perform well. Why so?
Was that done with an expectation that someday the share price of those companies would increase?
Well, this data gives a bit of understanding that retail investors applied for IPO without proper analysis, and on getting unexpected results of high or low listing prices they failed to make the right decision then.
Individual Investors Exit Less from Promoter Selling IPOs Compared to FPIs
Now there are different types of issues in IPO: Fresh Issue, Investor Seller & Promoter Seller.
Promoter Seller IPO indicates that the promoter is exiting their shares from the company which sometimes is the reflection of the poor financial health of the company.
In the report, however, the data indicated that individual investors exiting from Promoter Seller IPO within a month are lesser than that of FPIs.
Looking into other issues type, individual investors’ exit percentage from fresh & investors’ sellers’ IPO is almost double than FPI.
This raises concerns about the direction individual investors are taking. Are they making informed decisions? Do they understand the investments they’re making?
Individual Investors Sold 75% of Shares of Oversubscribed IPOs Within a Month
The exit behavior of individual investors also depended on the subscription of the IPO.
It has been seen that individual investors exit 75% of their shares in terms of value within a month if the IPO is subscribed more than 100x. On the other hand, IPO shares with lower subscriptions were generally held by these investors for more than a month.
A similar trend is observed in other investors’ behavior as well.
Individual Investors Sold, While Mutual Funds Bought ₹15,000 Crores Shares Within a Week
The most striking data point from the report is the post-listing buying and selling behavior of different investors.
The data reveals that while individual investors are net sellers, exiting the majority of their positions within a week, mutual fund companies are net buyers, investing heavily in those shares during the first-week post-listing.
What does this indicate?
Confused?
Consider this: where do mutual fund companies typically invest?
They usually invest in companies with strong fundamentals and growth potential to provide high returns to their investors
This activity and the corresponding data suggest that individual investors are missing out on opportunities to earn higher returns directly from the stock market.
And maybe they end up paying mutual fund companies to reap those high returns later from the same shares they sold post-listing.
Are Retail Investors Losing Out on IPO Gains: Time to Rethink
This research report of SEBI indicates a lack of long-term strategy and proper analysis among individual investors. Now by following a similar trend, retail investors might miss the opportunities of high returns in the long run.
Along with this data revealed the contrasting differences in the behavior of individual investors.
The contrasting difference is seen in the behavior of mutual fund companies which are holding IPO shares for a longer duration and focusing more on buying post-listing of shares.
This pattern highlights the need for retail investors to rethink their approach to IPO investments.
Instead of following the crowd and making impulsive decisions on seeing short-term gains, they should focus on conducting in-depth research, understanding the company’s long-term potential, and making informed decisions that align with their financial goals.
By doing so, retail investors can avoid the pitfalls of short-term speculation and better capitalize on the opportunities that IPOs can offer.
