How do IPOs help economic recovery?

10 May, 2021

8 min read

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How do IPOs Help Economic Recovery? - Smart Money
IPOs are an exciting investment opportunity for experienced and amateur investors and also a key ingredient in the cocktail that it takes to enable economic recovery.

According to a list published by IPO Central, at least 15 IPOs took place over 8 months in 2020. Between mid-March and the tail end of December 2020, big names like SBI Cards, CAMS, Burger King, and us at Angel Broking held IPOs in India.  Newspapers have widely noted the success of these IPOS, most of them turning around earnings for their investors.  There is huge demand among investors because some of 2020’s IPOs were subscribed 150x.

But beyond their potential to deliver earnings to investors and the fact that they are exciting, IPOs have a role to play in economic recovery. Let’s explore how companies’ going public correlates to improved economic health:

IPOs can fuel growth and job creation

IPOs are often taken on towards expansion plans or to fund new business verticals. These ventures usually correspond to new manufacturing, logistical, assembly, or retail centers and thereby create job opportunities. One of the quickest tickets to economic recovery is to reduce unemployment.  Reports have indicated that close to 10 million Indians lost their jobs in the last four months of 2020 and that unemployment continues to rise in the country. It is evident that job opportunities need to be generated by companies and IPOs offer companies the capital to pursue the expansion and growth that fuels job opportunities.

IPOs broaden investment opportunities

More companies on the market, from varying sectors, means that a larger cross-section of potential investors who might feel comfortable investing in a specific sector or a specific company.  For example, an investor who works in F&B might understand the F&B sector better and might have experienced a certain level of comfort understanding Burger King’s financials – such an investor could have therefore seen investment potential when the Burger King IPO was announced last year.

Bringing more investors into the stock market directly corresponds to more capital fuelling the job creation and economic growth that we discussed in point 1.  

Impending IPOs encourage healthier companies

When a company is getting ready for an IPO it behaves a little as one might before a big interview or a big date.  Just like a man or woman might ensure that they present the best version of themselves to an interviewer or potential partner, companies want to present impeccable financials to potential investors. They want to showcase a healthy bottom-line. They want investors to be able to see potential in their future plans and expertise in how they have managed their business so far. They will have been on their best behavior in the year running up to the IPO because they know they will be scrutinized by regulators and potential investors alike.

An impending IPO pushes companies to pursue business opportunities aggressively, even while maintaining the corporate social responsibility practices and ethics that will come out spotless under widespread public scrutiny.  One company in a sector moving aggressively will typically create some disruption in a sector, pushing other companies to wake up, catch up, innovate and possibly consider IPOs themselves, bringing more capital to the market, potentially resulting in more jobs.

An IPO draws focus to stock market investment

IPOs always make headlines and given that most people have minute-by-minute news updates, a lot of potential investors do end up reading about them. Even if a reader does not know what an IPO is, he will get some insights when the news update pops up. Interest is often sparked even among newbie or skeptical investors when they read about the earnings delivered by other IPOs. Some articles will also give details of the company’s profit and loss, business growth, and other key financial details. A reader might easily turn into an investor and given the level at which news proliferates these days, there is a large audience that can be impressed upon.  Even a small section of the market turning investor actually translates to a large number of investors in reality.

IPOs have the potential to draw in naysayers and risk-averse

IPOs are seen as two things:

1) Relatively easier to understand as compared to following stocks that are already behaving all volatile and unpredictable.

2) The opportunity to get a piece of a growth story at a low price,

IPOs, therefore, can draw in new capital from investors that might have otherwise shied away from the stock market. In other words, they open up an all-new segment, offering the stock market access to capital that might have otherwise been out of bounds.  New capital, means an overall increase in capital for companies to use towards expansion and job creation – and thus the cycle continues.

Overall positive environment

If you look at any article about an IPO it lives and breathes positive numbers and an optimistic outlook. A bundle of IPOs on the horizon has a multiplier effect on such positive stories doing the rounds amidst otherwise depressing headlines that are characteristic of suffering economies. This could positively impact the overall outlook and openness of investors who are also consumers and, therefore, drivers of the economy. People are more likely to invest more and spend more when they are of a positive and open mind-set.

If you want to start investing in IPOs or if you feel like you would like you are ready to explore stock market investment, don’t allow anything to hold you back. Today you can trade easily and on the go via your smartphone.  Why not attempt to clock some additional earnings by putting some skin into the stock market – especially if you have calculated your risk appetite and are working with spare capital? We won’t lie to you: risk is a constant on the stock market BUT  you can always minimize your risk by choosing stocks and mutual funds whose strategies match your risk profile, and of course, by diversifying your investments. Start your investment journey with Angel Broking and always remember: Everyone can invest, irrespective of age, gender, or occupation.

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