Comprehensive guide to listing gains in IPO

Initial Public Offerings (IPOs) are a great source of wealth creation for long-term investors. Nonetheless, IPO listing gains make them equally attractive to short-term investors. Don’t understand the listing gains meaning?  

What is the meaning of IPO listing gains?

Well, in layman’s terms, the listing gain is the difference between the price at which an IPO is offered to the public and the price at which it gets listed (first price) on exchanges. For example, Varun applied for the shares of DFG Limited in the IPO which was priced at, say, Rs 100 per share. The stock quoted Rs 120 at listing—which made Varun the listing gains of 20%—Rs 120 on the investment of Rs 100. 

What transpires to listing gains?

Technically speaking, a demand-supply mismatch makes it possible to generate listing gains. If the demand for shares at the time of the IPO outstrips supply, naturally, many investors fail to get the allotment. Those who don’t get the allotment in IPO try to buy shares on the day of listing—especially the big institutional investors. As demand exceeds supply, prices jump resulting in listing gains for the investors who got the allotment during the IPO. 

What affects the IPO listing gains?

• Company’s growth outlook: This is one of the most important factors that drives IPO listings. Companies that operate in sunrise sectors and depict high growth potential usually manage to pull in a lot of investors, thereby driving demand for the shares during the IPO. 
• Company’s brand story: Retail investors often get influenced by the familiarity of the brands of an IPO-bound company. For instance, it’s far easier for a popular cosmetic brand vis-à-vis a hardcore B2B engineering company to make an IPO pitch to retail investors. 
• Valuations: Moderate valuations attract investors. IPOs of companies that purposefully leave some money on the table for IPO investors receive huge oversubscription. Valuations and IPO listing gains are often inversely proportional. Higher valuations lead to lower chances of making listing gains and vice-versa. 
• Grey Market Premium (GMP): Grey market is a shadow market that runs in parallel to the primary market. Here, investors unofficially bid for IPOs before they get listed. When grey market investors are ready to pay a price which is higher than the issue price, the issue is said to command a premium.  This, in turn, improves the prospects of the issue. IPO investors shouldn’t take grey markets too seriously. Nonetheless, they do offer directional guidance. 
• Market conditions at the time of listing: Difficult market conditions often erode the prospects of listing gains. In contrast, favourable market conditions and upbeat investor sentiment help even weak IPOs sail through.  

Now let’s see how the recently listed IPOs have fared on their stock market debuts. 

Analysis of recent IPO listing gains suggests that the calendar year 2023 has been quite an eventful and productive year for primary markets. Although a few companies such as JSW Infrastructure, Mankind Pharma and RR Kable got listed only recently, they have been well-established names in their respective industries for years. They haven’t disappointed investors. 

The key takeaways 

Several factors determine the quantum of lPO listing gains which include growth prospects, brand story, valuations, grey market premium and market conditions at the time of listing. Nonetheless, listing gains is just one way to benefit from new listings. If you choose the IPOs carefully, they offer long-term wealth creation opportunities to serious investors.

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