What is Pre IPO Investing?
- 10 Oct 2024
- By: BlinkX Research Team
Pre-IPO stocks are those of firms that have yet to become public. As a pre-IPO investor, you will become an essential stakeholder and contribute to the company's success. It is also feasible to make a large profit when the firm goes public.
In the stock market, pre-IPO firms are those that have not yet registered their Initial Public Offering, or IPO. Previously, pre-IPO investment was exclusively open to high-net-worth people, as regular investors could only invest in publicly traded firms. However, things have changed, and today the common investor may own shares in a rising company. Investing in these firms may benefit investors for various reasons, including financial and other benefits tailored to each individual.
Understanding Pre-IPO Investing
A considerable number of shares are sold privately through a pre-initial public offering (IPO) placement before a stock is listed on a public exchange. Because of the scale of the investments being made and the high risks involved, the price stated in the prospectus for the IPO is frequently reduced for such investors. Private equity firms, hedge funds, and other institutions looking to buy large stakes in a company are typically the purchasers.
Previously, it was not available to all investors. Because the minimum investment criteria are so high, only High Net Worth (HNI) category individuals might invest through this approach. Such investments were viewed as complex since they needed a thorough grasp of the financial system and current market structure. As a result, only private equity firms, banks, venture capital firms, and so on could invest in businesses before they became public.
However, it is now available to everyone, particularly retail investors. Everyone may invest in the pre-IPO phase by selecting the right company and monitoring the firm's growth trajectory. By dematerializing its shares, the company may now sell them to anybody and easily move them from one Demat account to another.
Table of Content
- Understanding Pre-IPO Investing
- How does Pre-IPO Investing Work?
- How do I buy pre-IPO stock?
- How does the Profitability of Investing in Pre-IPO Work?
- Advantages and Disadvantages of Pre-IPO Investing
How does Pre-IPO Investing Work?
Companies do not go public unless they have met specific commercial objectives. Before the IPO, they gather funds from investors who want to invest in pre-IPO firms to get a larger return on their investment than if they bought the company's shares on the open market.
Consider the following thorough example to better understand how pre-IPO investment works:
Assume you invest in ABC through pre-IPO investment and purchase 200 shares at Rs 1,000 per share. ABC firm will get Rs 2,00,000 in financing from you as a result of this transaction, which they can use for any business purpose. When the business ultimately decides to go public, its valuation may have grown, with the value of one share rising to Rs 2,500.
During the IPO, the firm offers one share for Rs 2,500, where you can sell all of your 200 shares to the public or keep the shares for the long term if you feel the shares will open at a premium. Now, at the time of the IPO, one of two possibilities may occur:
Scenario 1: You sell 200 shares during the IPO.
If you opt to sell your 200 shares to the general public, you will earn Rs 2,500 per share since the general public will acquire the company's shares at this established price. The total cash received in the transaction would be Rs 5,00,000.
Profit: Rs 3,00,000 (Rs 5,00,000 – Rs 2,00,000)
Scenario 2:
After the IPO, you keep your 200 shares for listing profits. If you opt to keep your 200 shares because you feel they will open at a premium, you can sell them following the company's IPO. Assume the stock opens at a 30% premium and closes at Rs 3,700. for the end of the market, you can sell them for this price.
Profit total: Rs 1,70,000 (Rs 3,70,000-Rs 2,00,000)
This is how pre-IPO investment works in India, allowing investors to benefit more than during an IPO.
How do I buy pre-IPO stock?
Investing in firms before an IPO is a lengthy and difficult process that involves professional advice on eligibility, legality, shareholder duties, future scope, and so on. If you are an investor wanting to invest in firms before they go public, you should consider the following:
- Consult a financial advisor that specialises in pre-IPO investing and capital raising, such as BlinkX. The advisers can provide you with significant insight into how pre-IPO investment works and other know-how.
- Look for new firms that want to raise capital and are in the early stages of establishing and developing their operations.
- Consult local banks or any other VC firm to determine when a company wants to raise funds and whether you may invest.
- Save and set up an investing fund, preferably with a large sum of money. The larger the fund, the more likely you will be able to invest your money in pre-IPO firms.
- You may become an angel investor by expanding your network in the fundraising community and consulting existing angel investors on the pre-IPO investment process.
How does the Profitability of Investing in Pre-IPO Work?
When investing in an initial public offering (IPO), you may have two alternatives.
Option 1: Assume you purchased shares in the firm during the pre-IPO period for Rs 2000 per share, and the company is now offering shares to the public during the IPO period for Rs 2500.
You may only sell such shares during the IPO and receive the advertised price, which is Rs 2500.
Option 2: If you believe the company's shares have the potential for a price increase, you can retain them until the IPO process is finished. Assume the firm's shares you invested in in this manner were opened at a premium and traded at the stock exchanges for Rs 3500.
You may now sell those shares on the secondary market for Rs 3500 per share.
This is how investment works from the standpoint of the investor. It all comes down to utilising informed market predictions about the firm and investing by evaluating its fundamentals. Prior research is required before investing in any market, whether primary, secondary, or pre-IPO. Adopting the proper investment plan leads to increased profitability.
Advantages and Disadvantages of Pre-IPO Investing
Here are some advantages and disadvantages of pre-IPO investing:
Advantages of Pre-IPO Investing | Disadvantages of Pre-IPO Investing |
|---|---|
| Offers potential for high returns. | Market uncertainty can impact investments, leading to losses. |
| Less affected by stock market volatility. | A lack of market behaviour knowledge can lead to unpredictable outcomes. |
| Companies offer discounted share prices, attracting investors. | High risk associated with startup companies' success or failure. |
| Access to shares of strong companies at discounted rates. | Uncertainty regarding SEBI approvals and company decisions for IPO. |
Conclusion
Pre-IPO investment is a new manner of investing for retail investors, as well as a new set of prospects to earn a good return. In such cases, you do not gamble on the share prices; instead, you predict the fundamentals and internal management of the firm, which will lead to actual wealth gain in the long run. In such cases, using a dependable stock market app may help track investments and market developments.
