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Investing in an IPO can be an exciting opportunity, but knowing when and how to exit is just as important as applying for one. Once a company gets listed, investors must decide whether to book profits early or stay invested for the long term.
This article explains the process of selling IPO shares, the factors to consider before selling, and the different strategies you can use. It will help you make informed decisions based on your financial goals, risk appetite, and market conditions.
Key Takeaways
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IPO shares can be sold after they are credited to your demat account and the company gets listed on the stock exchange.
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Selling decisions should be based on your financial goals, risk appetite, and tax implications, not market hype.
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Investors can choose different selling strategies, such as listing-day selling, partial profit booking, or staggered exits.
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Having a clear exit plan helps manage volatility and improve decision-making when selling IPO shares.
Understanding IPO
IPO or Initial Public Offering is a process through which a private company becomes a public company by offering its shares to the public for the first time. Through the IPO, the company’s name gets listed on the stock exchange, and its shares will be available for the public to trade in. If shares are allocated to you in an IPO, those shares will be credited to your Demat account. Now, whether you want to sell your shares or hold them is your call. However, you need to consider certain factors before you sell your shares.
Process of Selling IPO Shares
Once IPO shares are credited to your demat account, you can sell them after the company is listed on the stock exchange. The first step is to log in to your trading account on the listing day and track the stock’s price movement. Based on your investment plan, you may choose to sell all or part of your allotted shares.
You can place either a market order to sell at the prevailing price or a limit order if you prefer a specific selling price. If the stock lists at a discount, you may reassess your decision and wait for better price levels. The key is to align your selling decision with your financial goals and risk comfort rather than reacting emotionally to short-term price movements.
Factors You Must Consider Before Selling IPO Shares
Let’s take a look at the factors to consider for selling the IPO shares before we dive deeper into how to sell them.
1. Risk
Like any other market instrument, an IPO involves risk. So, you should consider your risk-taking capabilities and the impact of selling your IPO shares on your portfolio before making any decision.
2. Tax Implications
Gains from the sale of IPO shares are liable for capital gains tax depending on the holding period.
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Short-term capital gains (STCG): For IPO shares sold within 12 months of listing, profits are taxed at 20%, plus any surcharges and cess.
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Long-term capital gains (LTCG): Gains above ₹1.25 lakhs from the sale of IPO shares after 12 months are taxed at 12.5% without indexation.
Holding IPO shares for more than a year may provide a tax benefit due to the lower tax rate and exemption level.
3. Restrictions to Sell
Retail investors are not generally subject to a lock-in period and can sell IPO shares as trading starts and the shares are credited to their demat account. Lock-in constraints are normally only applied to promoters, anchor investors, and some pre-IPO shareholders, according to SEBI laws. Before submitting a sell order, check to see if there are any special limits on your category of allocation.
How to Sell Shares Allotted in an IPO?
Once you have decided to sell IPO shares, either of the following strategies will be helpful for you.
1. Sell on the day of listing
As per researchers and analysts, it is believed that most IPOs tend to perform well on a listing day as compared to other trading sessions. Thus, selling on a listing day is considered better than selling after 2-3 years. However, you need to pay special attention to the pre-market session to decide whether to sell on listing day or not, as it gives a reasonable estimate of where to stock is headed.
2. Partial selling on a listing day to cover your expenses
Selling only partial shares is a great way to recover your initial investment while retaining some part. Let’s understand this with an example - Mr A holds 150 shares at ₹200 each, and his total investment is ₹30,000. If the stock price gives you a return of 40% on a listing day, the opening price would be ₹280. Under this strategy, he can sell 108 shares out of 150 shares to recover the invested amount. He can keep the remaining 42 shares for a long period to earn good returns. With this strategy, you can cover the costs you have incurred while staying invested. It helps you make a profit if stock prices increase in the future.
3. Selling in instalments
Another strategy you can implement is selling small quantities at a time. As per this strategy, you can choose to sell after the company's quarterly reports are out. This can prove beneficial for you as it will give you an idea of whether the stock prices are likely to fall or rise in the upcoming quarter.
4. Selling 50% upfront and 10% every quarter
It is another instalment selling strategy, but the difference is that instead of selling equal quantities, you sell 50% upfront, recovering your initial investment. The remaining 50%, you can sell in 5 instalments of 10% each based on the company's quarterly report. Generally, this strategy has worked well with companies listed at around 40-50% gain.
Note: Kindly note that these are generic selling strategies, and the results from these entirely depend on your financial standing and goals. Please speak to your financial advisor to help you plan better.
How to Sell IPO Shares on the Listing Day?
To understand how to sell IPO on listing day, start by logging in to your trading account once the stock begins trading. Check the opening price and overall market sentiment before placing a sell order. You can choose a market order for quick execution or a limit order if you have a target price in mind.
Keep an eye on price movements during the initial minutes, as volatility is usually high. Selling should align with your return expectations and risk appetite rather than short-term excitement.
When to Sell IPO Shares?
Another important question that arises is when you can sell IPO shares. Selling IPO shares depends on your financial goals. However, before selling, you need to know how much profit you make when you decide to sell and exit the market, irrespective of the selling strategy used.
Generally, investors tend to sell their shares on the listing day of IPOs as the prices are higher compared to the year-end. Simply put, there is no right time to sell the IPO shares as they may differ from one investor to another based on their financial goals. Another important thing that you must know is that, on a listing day, trading starts at 10:00 am, unlike at 09:15 am on regular days. So, you just need to implement the right selling strategy at the right time to exit the market to earn profits.
Common Mistakes to Avoid When Selling IPO Shares
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Selling in panic due to early price fluctuations without analysing the stock properly
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Relying only on market hype or social media opinions
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Not having a clear exit plan or profit target
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Ignoring the company’s fundamentals and long-term potential
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Using only market orders without considering limit orders during high volatility
Conclusion
An IPO is a process through which a private company goes public, and investors get a chance to become a part of the company with high growth potential at an early stage. Since the future is unpredictable, having an exit plan, even for an IPO, is a must before you place your orders. The above strategies will come in handy for you to start planning your exit strategy, and you can also tweak them to fit your financial goals.
