IPO Timing Strategy: Important Factors You Should Know

Key Takeaways

• A bull market typically sees strong IPO performance due to rising prices.

• Bear markets may lead to weaker IPO demand, affecting potential returns.

• IPOs can be volatile, so it's essential to evaluate your ability to withstand potential losses from market fluctuations when deciding on the right time to invest.

• Assess the company’s industry outlook and performance to gauge the IPO’s growth potential. 

• High demand and oversubscription often indicate a premium listing, making it crucial to track investor sentiment and demand during the IPO subscription period.

Investing in an IPO can be very lucrative, but the key to that is to choose the right time and the right company. With more and more IPOs being launched, forming an IPO timing strategy is crucial to making the most of your investment. 

Learn more about the impact of market conditions, investor sentiment, and other aspects to determine the best time to invest in IPOs.

How the market is moving is one of the key factors you should consider while determining your IPO timing strategy. Generally, the market condition can be classified into bullish and bearish. Both of these scenarios are ideal for different investors and their risk appetites. Here is an overview of what these are and which can be ideal market conditions for IPO:

Bull Market 

In a bull market, the movement is expected to be upward. This means that the price will increase or is anticipated to increase. Generally, the rise is 20% or more for a period of at least two months. Given this, IPOs often perform well during this period, making it an ideal time to invest. 

Bear Market

In a bear market, the movement is expected to be downward. So, the price is dropping or is expected to drop. Generally, the drop is 20% or more for at least two months. Given this, IPOs often don’t see the same demand as that during a bull market. In fact, companies often push the IPO launch during a bear market.

While the market condition is an important part of your IPO timing strategy, you also need to consider other factors. These include:

Risk Tolerance

IPOs are lucrative but also have some risks, one of them being market fluctuation and its impact on the price. Due to these movements, your investment value will go up or down. If it goes down, it will be a loss which will affect your finances. So, make sure you understand how much loss you can withstand and decide accordingly.

Industry Performance/Outlook

The current industry performance and outlook of the company issuing IPO will have a significant impact on how the stock will perform. Generally, strong performance and a favourable outlook are ideal as they indicate good pricing.

Demand

The demand for an IPO will give you insight into whether the IPO is a good option. If the demand is high and there is oversubscription, the listing will generally be premium. 

To gauge this, you can wait for a day or two during the subscription period and decide whether you should invest. You can also run an investor sentiment analysis for a better understanding of how the IPO will perform.

While it is important to figure out the best time to invest in an IPO, it is equally important to know the right time to exit. This will help you minimise risks and maximise returns. 

Here are the different types you can consider:

• Complete exit: You sell all your shares once listed and forfeit the potential gains

• Partial exit: You sell enough shares to liquidate your capital and hold the remaining for potential growth

• Buyback: The company may offer to buy back the shares at a certain price, giving you an opportunity to exit

• Sale: Instead of the secondary market, you can sell the shares to third party at a specific price, leading to better returns

Here are some tips you can keep in mind while deciding your exit strategy

• Conduct thorough research to see if it is an ideal market condition for IPO exit strategy

• Run a financial health check of the company and assess other aspects like prospectus and growth potential 

• Conduct an investor sentiment analysis to time your exit and ensure you don’t forfeit future potential gains without reason

With this information, you can formulate the right IPO timing strategy and maximise your gains. You should focus on portfolio diversification to further mitigate the risks of market volatility. Consult with an expert to ensure you make a decision that aligns with your goals and current finances.

1. Should I invest in an IPO on the listing day or wait?

The best time to invest in an IPO largely depends on your investment goals and market conditions. If you want to invest for the short term, you can consider investing closer to the listing day. However, if you are investing for the long term, you should wait until the initial excitement/volatility settles so you get a fair deal. 

2. How do I spot hype vs. genuine growth potential?

To determine between IPO hype and genuine growth, you should do your research. This includes carrying out investor sentiment analysis and running a financial health check of the company. With proper research, you can better determine if investing in an IPO is the right decision.

3. Does a bear market mean I should avoid IPOs?

Yes, you should avoid investing in IPOs during a bear market. This is because the movement is generally downturn and you may see no or low listing gains. 

4. What financial ratios are crucial for IPO timing?

There are several ratios that can help you run a financial health check of the company and determine if it is the right time to invest. These ratios include:

• Price-to-Earnings (P/E)

• Debt-to-Equity (D/E)

• Price-to-Sales (P/S)

• Operating Profit Margin

• Return on Equity (ROE)

5. Can I exit early if the IPO spikes?

When you exit and sell your IPO depends on your investment goals. If you are investing for the short term, you can sell them once you see the profits. Additionally, if you see significant gains on the listing day, you can consider selling to avoid the risks of price fluctuations. However, if you are an investor with a lock-in period, you cannot sell your share before the period ends.

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