When a private company offers shares to the public through the issuance of stocks, it is called an IPO or Initial Public Offering. A private company can raise capital from public investors through an IPO. Private investors can fully realise their gains when a company transitions from being privately owned to a public company, as the then private investors usually get a share premium.
The secondary market is where previously-owned stocks and securities are traded. The National Stock Exchange or NSE and the Bombay Stock Exchange or BSE are secondary markets in India.
POs are traded on both secondary and primary markets through an online investing platform. Both markets trade shares of companies. The difference is that IPOs are new stocks that have not been owned by anyone previously. In contrast, stocks in the secondary markets are preowned.
The debate of which is better, investing in IPOs or the secondary market, is quite old. Still, IPOs are more advantageous in some respects than secondary market investments. Some of these advantages are listed hereunder.
- Access to quality unlisted stocks
Many prominent companies have entered the Indian stock market in the past few years through IPOs. L&T infotech, Teamlease, Avenue Supermarts, Affle, Dixon Technologies, IndiaMart, Zomato, Nykaa, Paytm, Coal India etc., came into the market through IPO listings. This has widened a small investor’s choices. The advantage of investing in IPOs of these companies over shares available in the secondary market is that the investor has to pay a steeper price for the same stocks in the secondary market than an IPO. The issuer and the merchant banks fix the IPO price to elicit the maximum demand.
- Access to quality government owned PSUs
Government-owned companies are generally associated with lower risks, and investing in them is safer. These companies also offer hefty dividends. When the same Public Sector Undertakings (PSUs) are listed in the secondary markets, they are overpriced. Thus, investing in IPOs of the same PSU will give an investor an upper hand. Companies like Hindustan Aeronautics and Cochin Shipyards are some of the high-quality PSUs offered in the market. However, Coal India, listed in 2010, remains the largest IPO ever.
- New IPO norms in favour of small investors
SEBI (Securities and Exchange Board of India) tries to get small and retail investors good deals in the IPO market. Thus, some of the critical reforms in promoting this were: retail investors are eligible for a discount on the issuance price applicable to HNIs and institutions. The small investors under the retail quota are eligible for higher allotments, which are not available in the secondary market.
- IPO norms by SEBI
SEBI’s focus has been on protecting the interests of small and retail investors. Thus, companies and investors have been compelled to follow high standards of transparency and disclosure. As a result, investing in an IPO has become safer and more professional for small investors. The IPO markets have all the intelligence of a company consolidated into a prospectus. In contrast, secondary markets are saturated with information but limited insights. The limited time for which an IPO is listed has made companies and investment banks fine-tune their processes.
- Symmetry of Information
Secondary markets are usually tracked by insiders, institutional investors, and analysts. These investors and analysts have an advantage over the information access. On the other hand, analysts do not track IPOs, and the only information source is the company’s prospectus. This preserves information symmetry.
- The ASBA rule ensures IPOs are economical
Applications Supported by Blocked Amounts or ASBA have made the process such that the amount is debited to the account after the shares are allotted. This makes the investor not lose out on the interest on the amount not allotted, making it economical.