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Diwali 2025: Don't Let IPO Firecrackers Burn Your Portfolio

Amid the festive season and the IPO rush of 2025, investors can navigate this high-stakes environment by avoiding certain mistakes while applying for IPOs

Diwali 2025: Don't Let IPO Firecrackers Burn Your Portfolio
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Often in a bid to chase listing gains, investors old and new alike, end up making critical errors which can lead to significant losses

The rush of investing in the primary market is intense. In 2025, securing allotment and then witnessing a bumper listing for the stock are akin to winning a lottery. The allure of listing day gains draws in many new investors. However, all that glitters is not gold and the path to listing gains cannot be navigated on sheer luck alone.

Often in a bid to chase listing gains, investors old and new alike, end up making critical errors which can lead to significant losses. Amid the festive season and the IPO rush of 2025, investors can navigate this high-stakes environment by avoiding certain mistakes while applying for IPOs:

Succumbing to FOMO

The "fear of missing out" (FOMO) can become a powerful motivator during the IPO rush. Seeing the profits generated by successful applicants, other investors also feel motivated to seek similar gains in the primary market. Big-ticket IPOs, which have large ticket sizes or are linked to established listed companies, tend to generate a significant amount of buzz and garner media interest. Amid the frenzy, a false sense of urgency gets created, which can often lead to applicants applying impulsively for certain public issues as opposed to applying strategically. Investors can avoid falling for the hype by tuning out the noise and focusing on their own financial goals instead of chasing listing day gains.

Neglecting Due Diligence

A public issue is a company's introduction to the market; thus, the company tends to market the public issue and build genuine interest in its IPO. However, investors often fall for marketing alone and apply for public issues without conducting the due research required for such an investment. Investors are tempted to rely only on unofficial indicators of demand, such as the grey market premium. However, a more holistic approach towards investing in the primary market involves taking a deep dive into the company's red herring prospectus (RHP). Some of the key details that investors should know before applying for a company's public issue include the company's financial health, business model, and objective of the offer.

Ignoring the Valuation

Investors who apply for IPOs often do so to purchase shares of the company at a relatively lower price. However, investors must know that just because a company is going public doesn't mean its stock is being offered at a fair price. The initial price of an IPO is set by the company and its underwriters, and it may not accurately reflect the company's intrinsic value. Thus, it's important for investors to check the valuation of the stock before applying for the public issue. Investors can do so by learning about ratios such as the price-to-earnings (P/E) ratio or by seeking sound investing advice regarding the public issue from Sebi-registered investment Advisors (RIAs).

Lacking a Clear Investment Strategy

Often, primary market investors make the mistake of applying for a public issue without a clear financial goal in mind. The lack of a plan leaves them susceptible to emotional decision-making once the stock starts trading. Ideally, investors should define their investment goals before placing their bids. Investors who wish to gain from their investment in the long-term and believe in the company's growth story should be prepared to hold the stock through initial volatility; on the other hand, investors who are looking to simply benefit from short-term gains should have a clear exit strategy in place.

Overlooking the Lock-up Period

The "lock-up period" is a contractual restriction that prevents company insiders, anchor investors and early investors from selling their shares for a specified period after the IPO, typically 90 to 180 days. When this period expires, a large number of shares can flood the market, potentially driving the stock price down. Investors should be mindful of the expiration of the lock-in period and formulate their post-IPO investment strategy accordingly.

By avoiding these common missteps, new investors can approach IPOs with a greater sense of confidence and make more informed decisions, increasing their chances of a successful investment journey.

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