IPO Listing Gains: Meaning, Calculation and Identification

Many IPOs (Initial Public Offerings) have a lot of market demand associated with them. As many public investors want to get shares from these IPOs, you can make listing gains by selling them as soon as they are listed. 

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, many subscribers immediately sell their shares to other investors instead of holding on to them. In this way, they earn quick profits 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. Afterward, 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 open market.

The listing price of an IPO can be either lower or higher than its offer 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. 

How is the IPO Listing Price Decided?

The listing price of an IPO is determined by the underwriters of an IPO by taking into account several factors that indicate the overall performance of company stock. Refer to the list of factors given below to understand what affects 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 not as expected, 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 red flag 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 wanted to pay its existing debt using the proceeds of the IPO, its demand could weaken upon listing.

How to Calculate IPO Listing Gain?

As explained above, the listing gain of an IPO is the positive differential amount between its listing price and offer price. Thus the simple way to calculate the listing gain from an IPO is to subtract the total sell price from the total subscription price of an IPO.

To easily understand the calculation of IPO listing gain follow the example given below.

An investor Mr. Peter subscribes to an IPO and is allotted 6 lots with 30 shares in each lot. The offer price of each share was ₹100; therefore the total invested value for Mr. Peter was ₹18,000 (30 x 6 = 180 x 100 = 18,000). 

Later the IPO was listed at ₹250 per share in the secondary market. Mr. Peter quickly sells his entire holdings just after listing and he earns ₹45,000 (180 x 250) as returns. Therefore his listing gain for this trade was: ₹45,000 – ₹18,000 = ₹27,000.

However, if this stock was listed at a lower price, the differential amount between the offer price and listing price would be the listing loss from this IPO.

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 would likely perform.

  • Research Is Key

When investing in an IPO, ensuring to do sufficient research lets you formulate an effective long-term strategy. You should conduct 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 stay away from 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?

As an investor, your primary objectives should be to earn high returns and keep risks to a minimum. Hence, you should have that context in mind when deciding whether to invest in an IPO for listing gains.

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

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

Yes, as a primary investor, you can sell stock purchased via an IPO subscription on the listing day. However, few IPOs can be 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% as LTCG (long-term capital gains). LTCG is taxed at a 10% rate for gains above ₹1 lakh.

Do IPOs always generate profits?

No, IPOs don’t need to always be 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.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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