IPO Listing Gains: Meaning, Calculation and Identification

10 min read • Updated 17 November 2023
Written by Anshul Gupta
What is IPO Listing

Recently, IPOs are gaining popularity in the market. Investors use this process to earn profits in the short term as the shares list at a premium price. Though, some may list at a lower price but can earn you profits in the upcoming months. This can be used as an opportunity to earn significant returns in the short run.

However, it can be difficult to determine if a retail investor can make listing gains. Sometimes, investors can incur losses if the IPO underperforms compared to expectations. Thus, before investing in an IPO, you should be aware of all the factors that can affect the returns.

Keep reading the information given below to learn about the concept of IPO listing gains and how to avoid the risks of losses.

What Is an IPO Listing Gain?

When an IPO is listed on the stock market, after completing the subscription process, it may list at a loss or premium. If listed at premium, many subscribers immediately sell their shares in the secondary market on the listing day itself, instead of holding on to them for a long term. 

In this way, they earn profit with a short-term investment. The returns from this trade are referred to as listing gain in IPO.

How Do IPO Listing Gains Work?

IPOs are launched at an offer price determined by multiple factors related to the company’s valuation. In the next step, when the IPO is successfully listed it is offered at a price called the listing price. This listing price is determined from the performance of the IPO during the subscription process and also the demand for it in the secondary market.

The listing price of an IPO can be either lower or higher than its issue price, depending on the stock’s performance. When the listing price is higher than the offer price, investors implement the strategy to sell them as soon as possible to earn quick profits called listing gains

However, if a stock’s listing price is lower than its offer price and a subscriber sells his shares immediately after listing then that differential amount is called listing loss.
Many investors strategize and invest in an IPO if they see a potential to exit with profits immediately. This process is called IPO flipping. Its success depends on a number of factors such as the demand for the IPO, general market mood, global factors, and short-term outlook for traders.

Short Term or Long Term Gains?

The taxability of shares depends on the holding period of an investor. If you invest in an IPO and sell the shares within 12 months, the realized profit or loss is considered as short term capital gain or loss. On the other hand, if you hold the stock for 12 months and sell it afterwards, it will be considered as long term capital gain or loss. 

The following table simplifies the taxation of shares:

Holding PeriodRate of InterestType of Gain
12 months or Less15% + cess (if STT is paid)Short Term Capital Gain
12 months or MoreGains up to 1 lakh is exempted.
(including all equity mutual funds)

For gains over 1 lakh, the tax rate is 10% without indexation.
Long Term Capital Gain

How to Calculate IPO Listing Gain?

As discussed earlier, the listing gain of an IPO is the positive differential amount between its listing price and offer price. Thus, to easily calculate the listing gain from an IPO we need to subtract the total sell price from the total subscription price of an IPO.

Lets understand the calculation of IPO listing gain with an example.

I subscribed to an IPO of ABC Ltd. and was allotted 6 lots with 30 shares in each lot. The offer price per share was ₹500; therefore my total invested value equals ₹90,000 (30 x 6 = 180 x 500 = 18,000). 

On the listing day, the IPO got listed in the secondary market at ₹750 per share. I sold my entire holdings just after listing and earned ₹1,35,000 (180 x 750).

Hence, my listing gain for this trade was: ₹1,35,000 – ₹90,000 = ₹45,000.

However, if this share was listed at a lower price,say, ₹350 per share, I would have sold it at a loss ₹27,000 (90000 – 63000). This differential amount between the offer price and listing price would be the listing loss from this IPO.

Setting Off Of Short-Term Capital Gain Against Capital Loss

Short-term capital losses can be offset against either short-term or long-term capital gains. However, long-term capital losses can only be offset against long-term capital gains.
If you are not able adjust the losses in the current year, you have the option to carry it forward for up to 8 years, condition being, you file your income tax return in the current year.

How is the IPO Listing Price Decided?

The listing price of an IPO is determined by the underwriters of an IPO by considering several factors that indicate the overall performance of the underlying company.

Following is the list of factors that affect an IPO’s listing price:

  • Demand: The demand for an IPO in the secondary market before its listing is one of the most significant factors that determine the listing price. If public demand for the stock remains high after listing, its price will remain high after listing. In contrast, if the demand is low, the listing price will be lower than the offer price.
  • Market Influence: An IPO’s demand among retail investors largely determines its market sentiments. The subscription of an IPO in the retail segment also indicates the potential of a stock. This market sentiment also influences the listing price.
  • Grey Market Premium: Investors may choose to pay an additional amount other than the offer price to subscribe to an IPO, called Grey market premium (GMP). This GMP is considered a part of the under-regulated market. If investors are willing to pay a GMP for an IPO then it indicates that the IPO will probably be listed at a higher price.
  • OFS Value: Offer for Sale (OFS) value is the percentage of shares current investors of a company are willing to dilute to issue fresh shares to subscribers. Market investors may consider it a warning signal if existing investors dilute a majority number of shares in an IPO. This can affect the listing price of an IPO.
  • Growth Potential of a Company: The intention of launching an IPO and the future growth prospect of a company affect the interest of investors significantly. If a company plans to launch an IPO to fund a new business strategy then it could be able to garner investors’ interest. In contrast, if a company only wants to pay its existing debt using the proceeds of the IPO, its demand could weaken on listing.

How Do Investors Determine Listing Gain Potential of an IPO?

While there is no sure way of knowing how an IPO will perform after listing, investors assess the following points to get an overview of how it is likely to perform:

Research is Key: When investing in an IPO, ensure that you do sufficient research so that you can formulate an effective long-term strategy. Conduct exhaustive background research about all the factors like financial performance, plans, existing investors, etc. This will give clarity about a stock’s potential to perform in the market.

Subscription Status: It is important to check the subscription status of an IPO to determine its capacity to offer listing gains. If an IPO is undersubscribed or oversubscribed, it indicates its potential to offer a listing gain or listing loss.

Analyse the DRHP: A Draft Red Herring Prospectus (DRHP) is a mandatory document submitted to SEBI (Securities and Exchange Board of India) before a company can launch its IPO.

A DRHP contains all information related to the performance, history and financials of a company. This document reflects the company’s objectives to launch an IPO and its ability to perform in the market. Thus always include the DRHP while analysing your investment.

Create an Exit Plan: If you want to focus on listing gains, you should always prepare an exit plan for your investment. This will help you walk out of a bad investment with the least damage to your finances. In addition, you should plan your exit timing for an IPO to get substantial listing gains. Your exit plan must be based on research and analysis.

Avoid IPOs with Lock-in Periods: Some IPOs have longer lock-in periods than usual as per the discretion of the issuing company. To earn listing gains, you should avoid investing in IPOs with lock-in periods, otherwise, you will miss the chance to sell it at the listing price. 

Should You Invest in an IPO for Listing Gains?

Investors often ask whether they should invest in IPOs with the aim of gaining listing profits or not. The answer to this question depends on several factors, but the key principle remains the same: Analyze before you energize your investments.

You can earn good returns if you invest in a company for the long term if it has strong fundamentals and a progressive business plan. Hence, you can hold the shares from an IPO or buy shares from the secondary market and avoid listing gains entirely. Focus on the short-term aspect only if you are a short-term investor.

Moreover, you should be aware that all investments do not work as planned and hence, it is possible for an IPO to rapidly fall in value after listing. In such situations, you should focus on cutting your losses and exit the investment sooner than planned.

Final Word

Historically, some investors have earned substantial returns, even as high as 100%, from listing gains. However, this isn’t always the case. Hence, it’s crucial to diligently assess all aspects of an IPO. Additionally, it’s advantageous to approach your investment with long-term goals in mind.

By doing so, even if you don’t earn on immediate listing gains, you can still maintain your positions and choose to sell when the time is right for your exit strategy.

Also, taxation is an important aspect of gains. Make sure you make profitable deals and correct tax filing to avoid paying extra tax on your gains.

Frequently Asked Questions

Can you sell shares of an IPO on its listing day?

Yes, as a primary investor, you can sell stock purchased through an IPO subscription on the listing day. However, few IPOs are restricted from being sold before a certain period if it is stated beforehand.

Is tax applicable on IPO listing gains?

Yes, IPO listing gains are taxable just like any equity shares. If you sell your shares within a year from purchase, the tax applicable on your returns is 15% as it is an STCG (short-term capital gains). If your investment is above 12 months, it is taxed at 10% without indexation as LTCG (long-term capital gains). 

LTCG is applicable at the rate of 10% for gains above ₹1 lakh.

Do IPOs always generate profits?

No, IPOs are not always profitable. Several factors like market sentiments and business fundamentals affect the returns from an IPO and hence it can also offer negative returns in many cases.

What is an IPO?

Initial Public Offering or IPO is a process through which a private company gives out its shares to the masses for the first time. In return for giving ownership to its investors, the company raises capital and uses that amount to expand its business operation or pay-off its debts.

What are short-term capital gains?

Short term capital gains are those gains which are earned by selling the assets or securities within 12 months or less.

What are long-term capital gains?

Any gain that is earned by selling securities after 1 year are considered as  long-term capital gains.

Was this helpful?

Anshul Gupta

IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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