Some of the major reasons behind the increase in the number of investors applying for an IPO are rising awareness about its benefits, the simple application process, price transparency, and the ability to help meet long-term goals. Once the company is listed, you can sell IPO shares or retain them to achieve your long-term goals. However, if you choose to sell your IPO shares, you must strategically think and plan for it. Read the article to know what you should consider before selling and how to sell. But before we proceed further, let’s quickly revise the basics.
What is an 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.
Factors you must consider before selling IPO shares
Let’s take a look at the factors to consider for selling the IPO share before we dive deeper into how to sell it.
Like any other market instrument, 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
One of the most important things you should know regarding selling IPO shares is that the gains from these sales are taxable. If you sell shares allotted in an IPO on a listing day or within the first year of listing, you will be liable to pay short-term capital gain tax on your gains. On the other hand, if you sell shares after a year, you can optimize your taxes better.
3. Restrictions to Sell
Generally, there is a lock-up period on selling IPO shares to avoid dumping of shares that can cause the market value of shares to fall. Verify if there are any restrictions for you to sell the shares and make your selling decision accordingly.
Also Read – How to apply for an IPO
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. For instance, if a pre-market session has a return of 70-80%, then it’s a good decision to sell on the day of listing.
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 should sell 108 shares out of 150 shares to recover the invested amount. He can keep the remaining 42 shares can be kept 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 profits in case the stock prices increases in the future.
3. Selling in installments
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 installment selling strategy, but the difference is instead of selling equal quantities, you sell 50% upfront, recovering your initial investment. The remaining 50%, you can sell in 5 installments 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.
When to sell IPO shares?
Another important question that arises in mind is when can you sell IPO shares, right? Selling IPO shares totally 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.
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. Once you are sure about your investment plans, start your journey by opening a Demat account.