Getting into an IPO means that this is your chance to invest in a particular company before it goes public that is issues shares to the public. Yet one frequently asked question is, ‘Is it possible to sell an IPO on the listing day?’ The answer is yes, but there are many things that an investor should know about the mechanism of such a transaction, the profits or losses one can incur, and the correct steps to take.
This article fits the description because it elaborately discusses the topic of the regulations and laws that surround the sale of IPO shares on the listing day the principles for and against this practice and the considerations to make in case one is planning to make the sale.
Table of Contents
Understanding IPO Listing Day
The IPO listing day is the day when the company being floated is traded on the stock exchange for the first time. It is the actual selling of stocks that were floated during the IPO to the investors on the floor of the stock market for the first time.
Equity is flexible for many investors in the sense that this is the first time they can dispose of their shares in the company if they so wish to. When the firm lists the security, the price that the public is willing to pay for it may be way above or below what has been stipulated. At times the stock price could go very high up, at other times it could even fall even below the issue price. This volatility mostly results in what is called the ‘listing gains’ or ‘listing losses’.
Why Thing Can You Sell an IPO on Listing Day?
There is no restriction on selling a company’s IPO shares on the listing day itself. After the stock goes public through a particular exchange, it is possible to sell the shares like any other common float in the market. Thus on the fitting day an IPO share can be traded similarly to any other chunk through the trading account.
The majority of the investors who are in the market to earn quick bucks are found to unload their stakes on the listing day. This is especially the case where the stock opens at a much higher price than the initial public offering issue price hence enabling some investors to earn listing gains. Yeah, but whether to sell the shares or to keep holding them for a longer time depends on several factors.
As mentioned above, below are key factors to consider before making a sale on the listing day IPO shares;
Listing Gains Potential
Another benefit of selling on the listing day is the realization of gains that come with listing the security. That is if the stock opens at a price way above the issue price, investors can sell the shares on listing day and make quick bucks.
For instance, if you have subscribed to the shares at ₹100 in IPO, and you can sell the share during listing at ₹150, you are already making 50% profit. But not all IPOs generate such gains and one has to assess the market conditions and investors’ sentiments before concluding.
Market Sentiment and Demand
Retail investors generally dictate the price of the stock right from the day the stock is listed in the market. In case the demand for the IPO is high or the industry the company belongs to is popular, for instance, technology or pharmaceuticals, then the prices may be forced up. On the other hand, if the IPO got a minimum response or market conditions at the time of listing are not very good the stock may trade below the issue price and result in listing losses.
It is worth considering the general public’s interest in the IPO as well as other IPOs in the market that are being offered.
Long-Term Growth Potential
The fear of losing the entire money invested is likely to lead you to sell your stocks on the listing day and make good profits, but at the same time, you will be depriving yourself of future profits that could be realized once the stock price rises higher than the initial listing price. There is good growth for some companies after doing their IPO and the value of their stocks increases as time goes by as illustrated in the following examples.
For instance, while Amazon and Google went for IPOs, they experienced tremendous growth in their value of stock later on. If you trust the company’s strategy, maybe you should wait for the company’s stocks to increase their value to gain more profits.
Tax Implications
As highlighted for the listing-day sales consideration, one of the factors that one has to consider is tax. In many countries, the sale of shares on the day of listing may lead to short-term capital gains which in turn are taxed at a much higher rate than the long-term capital gains. If you dispose of the stocks you possess in the company after a particular time say one year you will be privileged to a concessional tax which is a long-term tax on capital gains.
As you read on, you will get to learn more about the tax effects that you are likely to incur from your sale and therefore whether it is wiser to sell your shares during the listing day or whether it is worthwhile holding the shares until a later date.
The period to be given to promoters and insiders for selling the company’s stocks varies depending on the type of company.
In this regard, what must be understood is that even though retail investors are unfettered to trade their IPO shares on the listing day, the same cannot be said for promoters and insiders of the firm in question. Some investors found themselves restricted by a “lock-in” period in which they cannot dispose of their stocks. This lock-in period needs to stop them from offloading large quantities of the shares into the market and consequently eradicating the value of the stock the minute the IPO comes into the market.
You as a retail investor are not restricted by these constraints however it is useful to consider them when assessing the availability of supply of shares on listing day.
A Look At Methods of Trading IPO Stock on Listing Day
Having outlined the factors to consider before selling IPO shares on the listing day, it is logical to proceed to the available options to help investors benefit from their investment. All these strategies differ according to your risk preference, financial objectives, and market forces in the market.
For the Listing gains you should sell Immediately
However, if you wish to make more profits faster, then you should be selling all the IPO shares on the day these shares are listed in the stock exchange markets. This is most appropriate especially if the stock opens at a price that is way above the IPO issue price. The disadvantage of this approach is that the price might go up even higher after you have traded and thus you may not enjoy more profits. Still, this approach has the advantage of safeguarding a profit and not losing it in the future due to a decrease in the prices.
Keep the price low until the listing day
Instead of this, some investors prefer to wait for the price fluctuations of the stock during the listing day and sell out once the price is as high as it could go. It has been observed that stock prices are highly unpredictable on the listing day as the prices move up and down before coming to the normal range within the same trading day. Therefore, by waiting for the best time to get into the business by buying the stock, it is possible to achieve even better returns. Yet getting it right is not easy, and there exists the possibility that it may be lower upon the decision to sell it.
Partial Selling
If their decision is in the middle of the two extremes, they should sell part of their shares when the company list and keep the other part for long term trading. It lets you benefit from the regular listing gains while at the same time keeping some amount of exposure to the particular stock if in case it does well in the future. For instance, if you were given 100 shares you may sell 50 on listing day, and retain the other 50 for accumulation.
Hold for Long-Term Gains
Indeed, if one has faith in the company that further business is definitely round the corner then continuing as a holder of the shares after the listing day is a good option. This is most appropriate for investors who do not care much about the fluctuations of the short-term price movements, but much more focused on the future of the company. However, if the company continues to be profitable and make good progress the share price will grow over the years giving greater returns compared to listing day.
Set Stop-Loss Orders
Yet, if you would like to take part in listing day trading and wish to avoid significant losses you must set a stop loss order. A stop-loss order triggers the selling of the shares when the cost reaches a given minimum or below. In this manner, you stand to minimize your losses in case the price of the stock slumps at the time of listing, but you will retain your shares in case the price goes up.
Stocks that float in the Initial Public Offerings are often a hot cake in the market, and many investors rush to invest their liquidity with the new stocks that are listed in the market, hence various risks associated with IPO selling on the listing day are as follows;
While selling on the listing day can offer quick gains, it’s important to be aware of the risks involved: While selling on the listing day can offer quick gains, it’s important to be aware of the risks involved:
- Price Volatility: This is the reason most IPO stocks witness high fluctuations on the actual day of IPO. Values of the underlying assets are highly volatile; this means that it is not easy to choose the right time to make a sale.
- Missing Out on Long-Term Gains: You may also risk selling on the company’s listing day and thus may miss a chance to undertake success in the future. Most of the stocks that are considered to be bad could come back and post good results in the long run in the stock market.
- Emotional Trading: This may be due to the classic ‘IPO pop’ and the euphoria that accompanies the listing of a firm, which many traders flock to buy more stocks in what experts refer to as the ‘IPO pledge’. Thus, people should not act on emotions and do not make decisions that are based on short-term fluctuations in the market.
- Market Conditions: Advertisement and broking firm activities have highlighted the fact that broader market conditions can play their part in influencing the price of the stock on the specific day that these stocks are listed. That is; high market factors generally lead to increased prices even if the company has performed badly while low factors lead to low prices even if the company has well performed.
Key Takeaways
- Yes, you can sell the IPO shares on the listing day and this is often prevalent among the investors intending to earn fast profits.
- It is imperative to evaluate the advantages and disadvantages when planning to sell the shares now or when to wait for long-term result.
- You need to keep into consideration your needs and the risks that you are willing to take so as to grow your investments with the firm.
- This could mean short term capital gain which attracts higher taxes than the long term’s one in case the trader decided to sell on the listing day.
Conclusion
IPOs available for sale on the listing day is a very attractive opportunity because the shares can be sold at a higher price in the case of listing at a higher price as compared to the IPO price. If you want to cash-in your stocks you should be able to make this decision based on the different factors such as the objective of the sale, market trends and the possible growth of the firm.
Speculative investors desiring to make profits within the shortest period of time will benefit from the selling on the listing day. On the other hand, the long-term investor may choose to hold his/her shares especially if the company has good growth prospects.
Finally, depending on position and client’s tolerance to risk it becomes clear that one strategy or another is correct. The factors discussed above help one understand some of the considerations in a given investment decision so that they don’t just arrive at a decision but a prudent decision.
Thus, it may be concluded that selling an IPO on the listing day is feasible and profitable, but it can result in the short-sighted viewpoint. It is for this reason that, depending on your objective whether to sell now, to hold for sometime later, or a blend in between, it is important to ensure that your strategy reflects your financial objectives when IPO investing.
