Thursday, August 10, 2023

IPO Investing Strategy - High Return & Low Risk

In this post, you will get to know, how one can gain in IPOs, without investing in IPOs. The strategy I am going to describe will be very helpful to you and it will take only few minutes of research. It is a very high probability and a low-risk strategy. 

I invest my money only when I have the utmost clarity of low risk and high reward. My way of investment in stock markets is purely academic in nature. So, my fund size and risk tolerance remain small. The moment the money at risk is small and the risk is also small, you ultimately cannot become rich. You might have an outstanding return, but you will not become a millionaire overnight. You will be in a slow and steady path towards learning how stock market investing works. 

What is my strategy?



As I described, my strategy does not take much research, but that comes with the experience which I have about stock market investing. Essentially, whenever there is an IPO buzz happening around, I do not subscribe to the IPO. Instead, I wait for the listing day. Just before the listing happens, I check three things:

Grey Market Premium:
Grey Market Premium is the first common thing which is checked by a lot of people. For the sake of clarity, let me tell you about grey market premium. It is the premium the stock is trading at, in the grey market. It is not a formal market, and as the name suggests, it is not very mainstream in nature. So, it’s like a Mock Test for IPO. If you have a positive grey market premium, there is a very high chance that on the listing day, you will have a positive return on that stock IPO. 


Nature of the Business:
The second signal is the nature of business. If you feel that the business prospect is good, then you have a positive signal number two. Now, how would you find that out, that is your skill, that is an art not a science. 


Subscription Status:
The third signal is the subscription status, was it 2, 3 or 5 times subscribed. You can have a very high subscription, but might not get positive returns on the listing day and you might have a very tepid kind of subscription, but you still might get positive returns on the listing day. So, this is a very fuzzy area. You have to have an intuition about these things.

Once you have the above three positive signals or rather let’s just take two positive signals out of the three, you move on to the second last stage.

What is the second last stage?
You go on to a trading platform, just few minutes before you put your money into it, check the trade lots, how many people are selling, how many people are buying. I use a full-service trading account, so I get this information pretty easily and I don’t know about the discount brokers, if they have such facilities, where they give you what is the trade lot, how many people are buying, how many people are selling.

After I gain confidence that yes! more people are buying than selling, my task is almost dome. I put my money and wait for the stock price to go up. Ideal scenario is that I do not just wait. I set up an automated order on sell, so whenever the price crosses a certain percentage, like 12-15% (in my case) on the listing day, I exit out of the market.
So, this puts an upper cap on my investment returns, but I am willing to do that, because in just a matter of few minutes or sometimes few hours I have around 10-12 percent returns, which is fair enough for me as I am not putting that in-depth research into that investment. It is just a 5-10 minutes of work for me and I am sitting on more than 10-12 percent of investment returns.
The moment I increase my fund size and increase a bit of my risk tolerance, then I will have substantial gains at a higher risk. That might not work for me, because the risk which you take has consequences and it’s not a lottery or a gamble. It’s just how numbers & probability work.

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