Many investors invest in the stock market today, and if you want to, there are two common avenues open to you. You can either go about your investment in the traditional investment way and invest in stocks directly through exchanges or subscribe to an IPO. Before comparing the pros and cons of both, it is worth finding out more about what they entail.
Table of Content
Stocks – Traditional Investment
Regular stock investment refers to the traditional way of investing in stocks or equity. This refers to the purchasing of stocks of certain companies that are already listed or publicly traded on stock exchanges. The prices of stocks fluctuate according to the factors of demand and supply. If you wish to invest in stocks from the stock market, you can do so through a broker.
IPO Investment
While considering the pros and cons of investing in an IPO and comparing IPO investment with regular stock investment, it is worth knowing what IPO investment is all about. An IPO (initial public offering) is launched when a private company goes public for the first time, that is, its shares are offered for public purchase for the first time. This is a way for private companies to raise capital.
An IPO can be invested in through a subscription and potential investors have a limited period to place their bids (requests for certain sums of shares allotted through an IPO) through IPO subscription. The company, then, may choose to allot the shares requested, may allot a lower amount, or may not allot any at all. After the IPO allotment process is completed, the company gets listed on a stock exchange, ready to be publicly traded.
Investment Differences Between IPOs and Traditional Stocks
In terms of the pros and cons of IPOs versus traditional investment with stocks, it is worth talking about the differences between these two investment channels and related advantages and disadvantages based on the following parameters:
- Information Availability
Regarding the pros of an IPO versus traditional stock investment, it is worth considering the availability of information linked with the two concepts. With an IPO, when a company has to go public, it files a prospectus with the Securities and Exchange Board of India (SEBI) and other regulatory authorities. All the information and data regarding the company are included in this document. In the case of regular stocks, this information is not available through any document. If you want to find out about the company issuing the stock, you must do your own background research. With regard to easy access to information, the pros of an IPO may stand out more than those of traditional stocks, but you must note that traditional stocks have years of performance historical data to back them up.
- Cost
Investing in an IPO, as you are investing in a bulk of shares at once, requires more capital investment. Where traditional investment in stocks is concerned, you can buy any number of stocks you want wherever you want to. Therefore, you may have to stretch your funds to afford an IPO, but you can invest in stocks aligned with your affordability.
Additional Read: Upcoming IPO in January 2024
- Returns and Risks
In general, IPOs may be considered riskier investments than regular stocks by some investors. This is due to the fact that a company launching an IPO is a relatively new company in the market compared with potentially well-established companies that have been listed on stock exchanges for a lengthy period and have appropriate track records. There may be some degree of uncertainty surrounding an IPO due to this.
- Timing
While investing in IPOs, pros and cons may be related to the timing required to invest in an IPO. For instance, IPOs give you a limited period to subscribe – this lasts for a few days – after which shares are allotted and the company gets listed on an exchange. In the case of regular stocks, you can invest when you want, depending on your own position and affordability.
- Accessibility
Regular investment channels for stocks are open to all investors at any time and in equal proportion. Through an IPO, investment is first offered to high-net-worth people and institutions first, then disseminated to the general public (retail investors).
Concluding Words
Traditional investment in stocks as well as IPOs have their distinct advantages and disadvantages. IPOs may potentially offer high returns after listing takes place, but the risks of investment may be considered high too. Stocks may be considered less of a risk, but all this depends on an investor’s distinctive financial goals and investing behaviour.
FAQs
Both IPOs and regular stocks come with investment pros and cons and investment decisions should be taken in consideration of your specific financial goals and investment plans.
Some of the pros of an IPO include gaining a host of information about the company through the prospectus and investing for prospects of potentially high returns in case the company is on a growth path.
There are pros of traditional investment in regular stocks, including that they can be accessed easily at any time, and you can buy stocks in whatever amounts you choose.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
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