Should You Hold or Sell Shares After an IPO?

Participating in an Initial Public Offering (IPO) is an opportunity for investors. Being part of a company from the start of its journey as a public company and seeing it grow could be exciting. However, the dilemma often faced by an investor after successfully getting the allotment of shares in an IPO, is whether to sell the shares immediately after listing with a profit or should it be held for the long-term.

In this blog, we will try to understand the strategies that will help an investor decide whether to sell or hold the shares after an IPO listing. So, let’s start the discussion.

What is an IPO?

Before we delve into the strategies. Let’s first understand what is an IPO. An Initial Public Offering (IPO) is a major milestone for any company going public. In an IPO the company offers its shares to the public for the first time and the public pay money to the company in return. The proceeds collected from the IPO can be utilized by the company for business expansion, debt repayment, or for growth initiatives.

An IPO is launched with a fixed price range for its shares, called the offer price. This is the price range within which the investors can bid for the IPO. However, once the company is listed and starts trading on the exchanges, namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), the price of the shares will fluctuate based on the demand and supply of the shares.

The Immediate Post-IPO Trading Scenario

Post listing, once the shares of the company start trading on the exchanges, the big question for an investor is whether should he hold or sell the shares.

The decision will depend on a few important factors, which we will discuss below.

Evaluate the Company’s Fundamentals

Understanding the company’s fundamentals is a good starting point, before making a decision. Find answers to the following questions.

Is the company’s business model sustainable?
What is the revenue growth model of the company?
Are the financials of the company sound?
What is the long-term growth potential of the company?

For example, if the company belongs to a high-growth sector like renewable energy or technology, with a solid track record and a promising future in terms of growth, then it is a good idea to hold the shares of the company. However, if the company belongs to a saturated sector with less promising growth prospects, then it will be a good idea to sell the shares and realize the profits.

IPO Price vs. Current Market Price

After listing the price of the share will fluctuate. The first few days of trading on the exchanges will give you an idea of the demand for shares in the market. If the price of the share has surged significantly above the IPO price, then it makes sense to sell the shares and make a quick profit, especially if you are looking for short-term gains.
On the other hand, if the stock price is hovering close to or below the IPO price, then it might be a good idea to hold the shares, especially if you believe in the company’s long-term growth potential.

Short-Term vs. Long-Term Investment Goals

What is your investment strategy? Are you someone looking for short-term profits or do you want to build long-term wealth?

Short-term investors: These are investors who typically sell shares soon after listing if the price of the share increases after listing.
Long-term investors: They are willing to weather short-term volatility in favor of potential greater returns in the future. As an investor, if you believe in the long-term growth prospects of the company, holding the shares might be a better option.

Market Sentiment and Timing

The overall market condition can play a crucial role in determining whether you as an investor should hold or sell the shares after the IPO.

If the overall market condition is bullish and strong, it might be a good idea to hold the shares, especially if the company is part of a growing sector.
If the market condition is bearish or uncertain, it will be a better decision to sell the shares if the price has appreciated.

Always look out for factors such as interest rates, inflation, and geopolitical events that can impact broader market conditions thereby influencing stock prices.

By understanding these factors you can decide whether to hold or sell shares after an IPO.

Strategies for Making the Right Decision

The Hold Strategy

You should be clear about your long-term goals if you decide to hold the shares. Holding shares works well in the case of high-growth companies with strong fundamentals. Be willing to ride short-term volatility and focus on the company’s future growth potential.

Ensure that you are comfortable with the risks the stock carries and believe in the management’s ability to deliver long-term value.
Periodically assess the company’s performance and the market conditions.

The Sell Strategy

Investors who want to capitalize on immediate price gain, follow the strategy of selling the shares after listing if the share price appreciates, that is the price goes above the IPO price.

To lock in the profits, sell the shares immediately after listing if the stock price increases.
Consider the tax implications, such as short-term capital gains tax. The tax is applicable if you sell the shares within one year of purchase.

The Partial Sell Strategy

Some investors follow a mixed strategy. Wherein they sell a portion of their IPO shares if there is price appreciation and hold onto the rest hoping to gain from the future growth in the company’s shares.

The Wait-and-Watch Strategy

If you are not certain of a stock’s performance, the best strategy will be to hold off making a decision. Watch for the stock’s performance in the next few weeks and months and see how it reacts to market conditions. If the company does well and shows strong growth potential then holding the shares of that company might be a better choice.

Let’s Take a Few Examples For a Better Understanding

Example 1: Nykaa (FSN E-Commerce Ventures)

IPO Date: November 2021
IPO Price: ₹1,125 per share
Listing Day Price: ₹2,001 per share (+78%)

Short-Term Impact: Those investors with short-term strategy, who sold on the listing day made a nearly 80% gain.

Long-Term Impact:: Over-time the stock has faced significant volatility and the share price has dipped significantly from its peak.

Lesson: IPOs that register significant short-term gains and then witness a decrease in prices over a period of time indicate an overvalued IPO.

Example 2: Adani Wilmar

IPO Date: February 2022
IPO Price: ₹230 per share
Listing Day Price: ₹265 per share (+15%)
Peak Price: ₹878 per share in April 2022 (+282%)

Short-Term Impact: Investors who sold the shares on listing made a decent profit. They however missed out on the meteoric rise in the price of shares over a period of time.

Long-Term Impact: Investors who held on the shares for a long time saw significant gains. The share price however corrected later due to broad market volatility and the allegations surrounding the Adani group.

Lesson: For high-growth shares having a partial exit strategy could be beneficial to lock- in partial gains while retaining a few shares for potential upside.

Example 3: Paytm (One97 Communications)

IPO Date: November 2021
IPO Price: ₹2,150 per share
Listing Day Price: ₹1,950 per share (-9%)

Short-Term Impact: Investors who sold immediately were able to limit their losses as the stock continued to decline thereafter.

Long-Term Impact: Investors who continued to hold the shares have faced significant losses, mainly due to poor earnings and cash flow challenges.

Lesson: Avoid holding stocks of an IPO with weak fundamentals and high- valuations, even if the IPO is from a well-known brand.

Example 4: IRCTC (Indian Railway Catering and Tourism Corporation)

IPO Date: October 2019
IPO Price: ₹320 per share
Listing Day Price: ₹644 per share (+101%)
Peak Price: ₹1,278 per share in February 2020 (+300%)

Short-Term Impact: Investors who exited on the listing day doubled their money.

Long-Term Impact: The stock has remained a solid long-term player, despite periodic corrections. The investors who held on to the stock have seen substantial gains.

Lesson: Monopolistic businesses coupled with stable growth and government backing are a good long-term bet.

Conclusion: Hold or Sell Shares After an IPO

Deciding whether to hold or sell shares after an IPO (Initial Public Offering) depends on several factors, including your investment objectives, fundamentals of the company, market conditions, and risk tolerance. There’s no one correct answer, but being well-informed and disciplined can lead you to the best possible decision regarding your portfolio.

Always do your due diligence to research market trends and speak with an advisor or expert when needed. Eventually, selling for short-term profits or holding for long-term gains depends on your financial goals.

Happy IPO Investing!