IPO listing gain refers to the profit that investors can potentially earn when the shares of a company are listed on a stock exchange for public trading.
In simpler terms, it is the difference between the price at which an Initial Public Offering (IPO) is offered to the public and the price at which it gets listed on the stock exchange for the first time. This gain is often expressed as a percentage of the initial investment.
In this article, we will examine more about IPO listing gain and parameters that affect this gain.
Factors Influencing IPO Listing Gains
1. Demand-Supply Dynamics
Listing gains are influenced by a demand-supply mismatch during the IPO. When demand exceeds supply, investors who couldn’t get IPO allotments often buy shares on the listing day leading to price jumps and listing gains.
IPO Oversubscription occurs when the demand for shares in an IPO exceeds the number of shares available for allocation.
A high level of oversubscription indicates strong investor interest creating a potential imbalance between the demand for shares and the supply allocated during the IPO.
Also Read : What is Face Value in IPOs and Why it is Important?
2. Company’s Growth Outlook
The growth outlook of a company, which involves expectations of expansion and growth, greatly influences IPO listing gains. Investors are attracted to companies in emerging sectors with significant growth potential.
Positive perceptions about growth industry trends and a strong historical performance build investor confidence.
Effective communication of growth plans, endorsements from industry experts, and a sustainable strategy enhance a company’s attractiveness.
A compelling growth story often results in high demand during the IPO, leading to favorable listing gains for investors seeking increased capital value.
3. Company’s Brand Story
Investor sentiment is influenced by the brand story. Recognizable brands often find it easier to attract retail investors compared to less-known entities.
If people know and like a company’s brand then more investors especially retail people may be interested. Brands that are well-known and trusted make investors feel more sure about the company.
This makes it easier for the company to convince people to invest in its IPO, especially when you compare it to companies that aren’t as well-known or don’t have a good story about their brand.
4. Valuations
Moderate valuations where the share price is reasonable tend to attract investors. Companies intentionally leaving room for investor gains often receive higher demand during the IPO.
It’s like setting a fair price tag—neither too high nor too low. Higher valuations where the share price is considered expensive may decrease the likelihood of positive listing gains as investors may be cautious about the return on their investment.
5. Grey Market Premium (GMP)
The grey market, where investors unofficially bid for IPOs provides an indication of demand. A higher GMP suggests potential listing gains.
However, GMP isn’t a surefire indicator and doesn’t guarantee the IPO’s success. It provides a sense of direction showing investor interest.
6. Market Conditions at Listing
In good market conditions where investors feel positive and there’s a strong demand for stocks, an IPO is more likely to do well. This means even if the IPO isn’t very strong it could still perform nicely.
On the flip side, if market conditions are tough the chances of having positive listing gains decrease.
So, how well an IPO does can be influenced by whether investors are generally feeling good or not about the overall stock market at the time of its introduction.
Top 5 IPOs with Highest Listing Gains:
Below are the 5 IPOs of India which listed at the highest value compared to their issue price, resulting in the highest listing gain.
| Sl No | Company Name | Listing Date | Issue Size (Cr) | Issue Price (Rs) | Listing Gain (%) |
|---|---|---|---|---|---|
| 1 | Paras Defence and Space Technologies Ltd. | 01 Oct ’21 | 170.8 | 175 | 185.0 |
| 2 | Happiest Minds Technologies Ltd. | 17 Sep ’20 | 702.0 | 166 | 123.5 |
| 3 | Mrs. Bectors Food Specialities Ltd. | 24 Dec ’20 | 540.5 | 288 | 106.8 |
| 4 | MTAR Technologies Ltd. | 15 Mar ’21 | 596.0 | 575 | 88.2 |
| 5 | Route Mobile Ltd. | 21 Sep ’20 | 600.0 | 350 | 86.0 |
Calculating Listing Gains: A Simple Example
To calculate listing gains, consider Kiya, who invested Rs 20,000 in an IPO at Rs 200 per share. The listing price rose to Rs 300, and Kiya sold for Rs 30,000.
- Initial Investment (I) = Rs 20,000
- IPO Share Price (P) = Rs 200
- Number of Shares (N) = I / P
N=20,000/200=100 shares
- Listing Price (LP) = Rs 300
- Selling Price (SP) = Rs 30,000
Listing Gains (LG) = SP – Initial Investment
LG=30,000−20,000=10,000 Rs
So, Kiya’s listing gains (LG) would be Rs 10,000.
Relationship Between Oversubscription and Post-List Share Prices
The connection between oversubscription and post-list share prices isn’t straightforward. While oversubscription suggests strong demand for an IPO, it doesn’t guarantee specific outcomes.
For Example, Dixon Tech which was oversubscribed by 117 times has delivered 83% returns, while MAS Financial which was subscribed by 128 times had 26% returns post-listing.
Oversubscription doesn’t consistently lead to higher post-listing performance.
Taxation of Listing Gains
When it comes to the taxation of IPO listing gains it’s treated as short-term capital gains given that these profits typically occur within a short period.
In many places, like India where securities transaction taxes (STT) apply, investors face a 15% tax on these gains. This tax rate might differ based on local tax rules.
In simpler terms, if you make a profit by selling IPO shares shortly after they’re listed then you’ll need to pay taxes on those gains. The 15% tax rate is a standard for short-term capital gains in various financial markets
How to get highest listing gain in IPO?
Here are important pointers to enhance your chances of getting higher listing gains in an IPO:
- Thorough Research:
- Investigate the company’s fundamentals, financial health, and growth prospects. Choose IPOs of companies with a strong track record and positive future outlook.
- Consider Market Conditions:
- Assess the overall market sentiment. Favorable market conditions often contribute to higher demand for IPO shares, potentially leading to better listing gains.
- Review Grey Market Activity:
- While not foolproof, monitoring the Grey Market Premium (GMP) can offer insights into potential demand. A positive GMP may suggest higher listing gains.
- Focus on Growth Potential:
- Prioritize IPOs of companies operating in sectors with high growth potential. Look for companies with promising future prospects, as they may attract more investor interest.
Also Read : What is Green Shoe Option and How it helps in IPO Process
Conclusion: Making Informed Decisions
Making money from IPO listing gains is a quick way to profit, but not every IPO is a sure thing for big success. It’s important to think about how the company plans to grow in the long term, what the market is like, and the company’s history. Choosing the right IPOs is key to making the most money.
FAQs about IPO Listing Gain
Q1. What is IPO Listing Gain?
Answer: IPO Listing Gain refers to the difference between the IPO offer price and the listing price of shares when they debut on the stock exchange.
Q2. How is Listing Gain Calculated?
Answer: Listing Gain is calculated by subtracting the IPO offer price from the selling price after the stock is listed on the exchange.
Q3. What Factors Influence IPO Listing Gains?
Answer: Several factors, including market conditions, oversubscription, company’s growth outlook, and valuation, can impact IPO listing gains.
Q4. Is Oversubscription a Guarantee for High Listing Gains?
Answer: While oversubscription indicates strong demand, it doesn’t guarantee high listing gains. Other factors play a role, such as market conditions and the company’s fundamentals.
Q5. How Can Investors Maximize Listing Gains?
Answer: Investors can enhance listing gains by researching thoroughly, evaluating market conditions, reviewing grey market activity, and focusing on companies with high growth potential.
Q6. Are Listing Gains Taxed?
Answer: Yes, listing gains are usually considered short-term capital gains and are subject to taxation. The tax rate is typically around 15%, but it may vary based on local tax regulations.
Q7. Should Investors Only Focus on Listing Gains?
Answer: While listing gains offer short-term profits, wise investors also consider long-term factors like a company’s growth potential, market conditions, and background for sustained success.
Q8. Can IPOs with No or Low Listing Gains Still be Good Investments?
Answer: Yes, some IPOs may not yield immediate listing gains but can still be good long-term investments. Wise investors look beyond short-term gains and evaluate the company’s overall potential.
Q9. What Role Does Market Sentiment Play in Listing Gains?
Answer: Positive market sentiment can contribute to higher demand and better listing gains, while negative sentiment may impact the IPO’s performance adversely.
Q10. How Important is Diversification in IPO Investments?
Answer: Diversifying IPO investments across different sectors helps mitigate risk and balance potential losses with gains. It’s a strategic approach for long-term investors.
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