Portfolio management has become a challenging task for investors in recent times due to higher volatility in the stock market. Therefore, most investors prefer investing in pre-IPO stocks, which are unaffected by market volatility. Developing an investment portfolio is crucial for investors as it serves as a roadmap in which investors articulate how much and what kind of risk they’re willing to take. However, it’s essential to build a well-developed portfolio by investing in the right pre-IPO companies that are looking to get listed on the public stock exchange, like BSE or NSE, in the next 2-3 years. As a potential investor, have you ever thought about what would happen if you make a delay in investment in pre-IPO stocks or how it will impact your portfolio? Let’s discuss it here.
What Are Pre IPO Stocks?
A Pre-Initial Public Offering (IPO) is a private sale of large blocks of shares before the stock is listed on a public exchange. In other words, pre-IPO stocks are those shares that private equity firms or small companies offer before going public or listing on the stock exchange in India. Being a pre-IPO investor, you can buy a significant stake in these firms and make a considerably higher return on the investment. Once the pre-IPO company becomes publicly traded, a part of its ownership is sold to investors. Generally, a company initiates an IPO for the given reasons:
- To facilitates the trading of its assets
- To raise capital for various requirements
- To monetise the investment of its private investors
- To release fresh equity capital
Why Are Pre IPO Shares Best Pick?
Undoubtedly, buying pre-IPO shares in startups early in their development is one of the proven ways to earn an exponential return. As pre-IPO shares are not listed on the public market, they’re not regulated by the stock exchange, thus allowing you to play the way you want. Nevertheless, pre-IPO shares are regarded as the ‘best pick.” Why? Here are some of the points mentioned below that will help you know –
- High ROI
Picking up the right company at the right time will help you fetch an enormous return on your investment. So, when the pre-IPO company goes public, the investor receives a huge chunk of return on investment. Therefore, investing in pre-IPO stocks can be a good decision for gaining a higher return on investment.
- Stocks available at discounted price
Since pre-IPO are small and private companies, they usually offer shares at discounted prices. It is also because the companies don’t know how to perform once they go public. If the company performs well and its share prices increase tremendously, you also gain a higher return on the investment.
- Big private equity
Every investor must know that any new investor’s success is determined by their ability to go public via IPO on the stock market. So, if you invest in such companies, you own some part of their big private equity, and when the company goes public, you get a higher return on the investment.
3 Most Serious Consequence Of Delay In Investment
If investors fail to invest in pre-IPO shares on time, they might face serious consequences, which include:
- Lower Returns
Since pre-IPO shares do not have a proven financial history, your initial research might be a little complicated but with Stockify, you can overcome these complications like a pro. Even if the pre-IPO company chooses to go public and fails to abide by the rules and regulations of the stock exchange, its plan of unveiling an IPO could derail. So, in case of delayed investment, you have to bear the risk of locking your capital for an unpredictable period without any significant return. Therefore, it’s always important to check the company’s details in terms of its IPO roadmaps.
- Low Compounding Benefits
Since pre-IPO shares are not listed on the stock market, delay in your investment might take a toll on your profit. It is because the actual price of the pre-IPO shares is determined only after it gets listed on the stock exchange. And when an investor delays the investment, they might not get a higher return and have to bear low compounding benefits.
- Risk Appetite And Its Implications
Investment in pre-IPO shares can only be beneficial when an investor makes it for the long term. Though there are risks with such investments, with pre-IPO stocks, risk is associated with the company rather than the market. If you want to buy unlisted stocks in India, you will have to make a long-term investment to bear the risk and associated tax implications. Delay in the investment will lead to a major downfall in your investment, and you may not get a higher return either.
Pre-IPO shares are a golden opportunity for investors to make money and build portfolios. A savvy investor must invest in a company’s pre-IPO share 12-18 months before its initial public offerings (IPO). The best thing to invest in pre-IPO stock timely is that you get shares at a discounted price. And if you delay the investment, you might face risk, as highlighted in the blog. Further, if you’re looking to invest in pre-IPO shares, then Stockify is here to help. You can connect with our unlisted share brokers.