Flipping in IPO: Meaning, Risks and Benefits
If you invest in IPOs, you should also learn the best ways to earn quick profits from your initial investment. It is important to know all the relevant information while investing in an IPO. This increases your chances of profit.
Flipping is a strategy investors use to earn profits from IPO investments within the first few days once securities are listed in the secondary market. Keep reading the details given below to learn about flipping and risks associated with it.
What Is Flipping?
When an investor purchases an asset to hold it for a short period and sells it for a fast profit, it is called flipping. Investors often purchase stocks and real estate assets only to sell them in a short time to earn handsome profits. This practice in the investment market is called flipping.
For IPOs, many investors see the chance to make quick profits if the share price soars up within a few days of listing. Then, they decide to take advantage of the growing demand for the stock and sell it at a higher price.
How Does Flipping Work in IPOs?
When an Initial Public Offering (IPO) is offered to investors, several investors buy shares of the IPO in lots and hold it for a minimum period. These investors sell their shares in the secondary markets as soon as these shares are listed.
If you are wondering why investors opt for flipping as opposed to holding the stock for a long term, it is because of the belief that IPOs might give a higher return if sold on the very day of issue with listing gains. Moreover, there is no certainty that the share prices will keep appreciating in the future.
This happens when an IPO is subscribed successfully and there is plenty of hype about it in the market. In such cases, retail investors, who fail to get an IPO allotment, tend to invest heavily in such stocks as soon as it is listed. Thus, if primary investors flip their IPO stock, then they earn high profits in a very short time.
In addition, when a popular company offers its IPO small-scale investors cannot subscribe to it due to the lot size and minimum investment requirements. Such investors wait for the stock to get listed and buy it in the secondary market. Primary investors take advantage of such opportunities and flip IPO stocks.
However, flipping is not an option for all IPOs. Some IPOs are offered at a price which is usually higher than its listing price; hence it is not profitable to sell such IPO shares in the short term. Hence, it is important to do your research and study the stock properly before you want to try flipping an IPO.
Example of Flipping in IPO
To understand the concept of flipping, follow the example given below.
Here are two scenarios to explain the concept of flipping an IPO. In the first scenario, the investor invests in an IPO with the intention of flipping. In the second scenario, the investor invests his capital for a long time.
- Scenario 1
An investor Mr B purchases 40 stocks of an IPO ABC Limited for ₹8,000. This IPO is listed in the stock market after 1 month for ₹500 and Mr B sells his shares on the first day itself at a price of ₹20,000 making 150% profits in just one month.
- Scenario 2
Another investor Mr N had purchased 40 stocks of the same IPO, ABC Limited for ₹8,000. After the IPO is listed for ₹500, he decides to hold his shares. After a year the share price falls to ₹300 and then rises to ₹520 after 5 years from its listing date. Mr N now sells his shares and gets ₹20,800 with a profit of 160% in five years.
Thus Mr B earned a high profit from the same shares within a month whereas Mr N earned a marginally similar profit from the same stock in 5 years as they implemented different strategies. Mr B used the process of flipping to earn quick profits.
What Are the Benefits of Flipping an IPO?
Flipping is a tricky strategy as it can turn into a loss as well. However, several investors still implement this strategy while investing in an IPO due to the following benefits.
- Quick Profits
The most important benefit of flipping an IPO is earning fast profits. When you sell an IPO as soon as it is listed and earn a high profit, your investment-to-profit timeline is very short which makes it an eye-catching feature for investors.
- Rolling Capital
Flipping offers you the opportunity to cash out your capital within a short period, thus, you can reinvest that money in another asset and earn profits from the same capital multiple times, if you plan your strategies right.
What Are the Risks of Flipping in an IPO?
Flipping an IPO requires extensive research and precise timing; hence it can be risky for inexperienced investors. The following risks should be considered before you invest in an IPO for flipping.
- Risk of Market Dependency
The process of flipping is dependent on market behaviour. You can flip an IPO only if it is in high demand when it is listed. However, when you invest in an IPO you cannot know for sure, if it will be in high demand. Your prediction of the market behaviour can easily go wrong.
This makes flipping a risky strategy. If the IPO is listed at a low price, it can take years to cash out your investment with a profit.
- Risk of Lock-in Period
Several IPOs require the primary investors to stay invested for a minimum period like one year or more. Hence if you invest in an IPO without checking its lock-in requirement, you might not cash out your investment for a comparatively long period.
- Risk of False Marketing
An integral part of a successful IPO listing is its marketing. Companies use advanced marketing strategies to project a superficial value of their stocks to create demand in the market. If you invest in an IPO due to marketing hype and it fails to perform well, you will not be able to flip it.
- Risk of Investor Influence
Institutional investors are known to influence market behaviour by tweaking stock supply for their profits. You may not compete with such investors. Despite adequate research, your predictions can go completely wrong, if the actions of such investors move the stock price downwards. In such a situation, you will not be able to flip an IPO after it is listed.
Investors use the process of flipping to earn fast profits from considerably risky investments. Flipping in an IPO means buying shares of an IPO to sell them as soon as they are listed on the secondary market to earn quick profits.
However, such profits are not assured and you need to do enough market research before you consider flipping an IPO. It is always a good idea to choose newly-listed stocks only if they have solid fundamentals to avoid making losses from your flipping strategy.
Frequently Asked Questions
What is an IPO?
An IPO (Initial Public Offering) is when a private company offers its share to the public for the first time. Companies issue shares to raise capital from the public in exchange for ownership rights. After investors subscribe to the IPO, the shares are listed on the stock exchange, where investors can freely trade shares among themselves.
Can you get rich by investing in an IPO?
IPOs often offer their shares at a discount to subscribers which offers the chance to make profits in the short term and long term. Investors sell IPO stocks in the secondary market either right after listing or after holding them for years. As the share market is unpredictable, it is possible to make large profits and losses from IPOs.
Is flipping an IPO illegal?
No, it is not against the rules to flip an IPO after its listing in India. Investors can sell their IPO holdings in the stock market after it is listed successfully. However, some IPOs have a minimum lock-in period. In such cases, investors have to wait for a while before they can sell off their shares.
Can you sell your IPO before its listing?
No, an investor has to hold their IPO shares till the day of listing. No one is allowed to sell the shares before the IPO is listed in the stock market according to SEBI (Securities and Exchange Board of India) regulations.