The craze for IPOs (Initial Public Offerings) is always high in the stock market. Whenever a big company launches an IPO, people line up to invest in it. But the question arises that once you invest in an IPO, for how long should you hold that stock? Is it right to hold IPO stocks for the short-term or the long-term?
Today, we will discuss this topic in detail. We will look at it from both short-term vs long-term angles, understand the pros and cons, and also discuss some real-life examples. So let’s get started.
If you don’t know how to invest in IPOs then please learn it from our article – How to Invest in IPOs and Make Profits
What is an IPO?
First of all, let’s understand some basics. IPO means Initial Public Offering. When a private company decides to go public, it sells its shares to the public through the stock market. These shares come to the market for the first time, hence it is called ‘Initial’ Public Offering.
Why is There a Craze to Invest in IPO Stocks?
- Chance of Listing Gains: The biggest attraction of an IPO is “listing gains.” When an IPO is listed at a price higher than the open price, the investor makes a profit in the short term.
- New Opportunity: IPOs represent new companies or new chapters of established firms. People want to take advantage of this fresh opportunity.
- FOMO (Fear of Missing Out): When other people are investing, we feel that we might miss out on something.
But not every IPO is successful. Sometimes stocks fall after listing, and people’s money gets stuck. That is why it is important to understand whether IPO stocks should be held or sold, and for how long.
Short-Term Holding: Pros and Cons
What does Short-Term mean?
Short-term holding means holding the stock from 1 day to 6 months after the listing of the IPO. Many people sell the stock on the day of listing itself if they are making a profit.
Advantages of Short-Term Holding
- Listing Gain Benefits: If the IPO was in high demand, there is a chance of the price increasing on the listing day. In such a case, people make a good profit in the short term.
- Quick Money: No one minds earning money by holding the stock for just a few days or weeks. If you want quick profit, short-term is right.
- Avoid risk: The market is volatile, and the IPO stock can fall even after listing. There is not much risk of loss by exiting in the short term.
Disadvantages of Short-Term Holding
- Limited Profit: If the company is going to grow in the long term, then selling in the short term deprives you of big gains in the future.
- Market Timing Pressure: There is no guarantee that listing gains will be received or not. Sometimes the stock falls on the day of listing itself.
- Emotional Decisions: Short-term traders make wrong decisions in panic.
Long-Term Holding: Pros and Cons
What does Long-Term mean?
Long-term holding means holding the IPO stock for 1 year or more. Many investors hold for 3-5 years if they have faith in the company.
Advantages of Long-Term Holding
- Benefit of Business Growth: If the company is performing well, its stock price increases with time. You can get multi-bagger returns in the long term.
- Magic of Compounding: Your returns compound with time. This is not possible in the short term.
- Tax Benefit (for U.S. Audience): U.S. In long-term capital gains, the tax rate is lower as compared to short-term gains. Holding for more than 1 year provides tax benefits.
- Less Stress: You do not need to look at the market price every day. Long-term investors are more relaxed.
Disadvantages of Long-Term Holding
- Patience is required: The market sometimes moves sideways or even negatively. Patience is important in long-term holding.
- The company can underperform: There is hype at the time of IPO, but if the company does not perform well later, then there can be a loss in the long term.
- Opportunity Cost: Your money gets blocked in one stock, whereas that money could have earned more by investing in other good stocks.
Let’s Understand With Examples
Example 1: Amazon (Long-Term Success)
Amazon launched its IPO in 1997 at $18 per share. Today, even after Amazon’s shares split, they have given a return of multi-thousand percent. Those who held it for a long term made life-changing money.
Example 2: Uber (Mixed Results)
Uber’s IPO came in 2019, the initial response was a bit mixed. The stock also fell after listing. But in the long term, the company stabilised and now growth is visible. Short-term people went into loss, long-term holders got the reward of patience.
Example 3: Paytm (India example, for global learning)
Paytm’s IPO came at a high valuation, but after listing, the price crashed. In the short term, many people lost their money. In the long term also there has not been a full recovery till now.
When Should One Consider Short-Term?
- When the IPO is overhyped, and there is a strong chance of getting a listing gain
- When the company’s financials are weak, the IPO is successful only due to the buzz
- When you need quick returns and you have market experience
Simple Checklist for IPO Analysis
- Company’s Business Model – Is it unique?
- Revenue and Profit Growth – What are you saying?
- Debt Level – How much loan is the company running on?
- Valuation – Is the IPO price fair or too expensive?
- Promoter and Management – Are they trustworthy?
If all these parameters are green, then long-term hold may be right. Otherwise, you can try to gain a short-term listing.
Conclusion: Short-Term vs Long-Term: What is Better?
IPO stocks can provide opportunities for both short-term and long-term investors. If you have some experience in the market and are in the mood to take risks, then you can earn listing gains in the short term. But if you can be patient and invest with an understanding of the business, then in the long term, IPO stocks can be a strong tool for your wealth creation.
Golden Rule: Not every IPO is the same. Your decision should depend on the fundamentals of the company, market conditions and your financial goals
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