IPO or Initial Public Offering is a process in which a private company raises additional capital for the first time by offering shares of the company to the investors. The pool of investors contains retail investors, financial institutions, banks, etc.
Before talking about why IPOs are launched during the bull market, let us understand what a bull market is and what drives it.
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Markets are in an incessant yoyoing motion. Sometimes they go up and the next sometimes they go down. But a bull market is an extended period when prices are rising in a sustained manner, especially when large numbers of investors are buying and holding stocks.
Bull markets are often characterized by high investor confidence and rising asset prices. The market is filled with enthusiasm and intrigue.
It is also accompanied by sustained economic development, where there are good volumes of liquidity in the market. This flow of money to investors enables investors to invest more in the stock market.
Some of the important factors that drive the bull market are high demand and low supply of securities, Investor psychology, and change in economic activity.
There is a general perception that IPOs are launched in bull markets to exploit the demand for the new shares.
However, the truth is that IPOs are launched in a bullish market to ensure that the company's stock is oversubscribed. This is because during a bull market there is a good amount of cash flow and enthusiasm in the market.
If the stock is oversubscribed, it means that the stock is very popular and investors have an interest in holding it apart from strong listing gains.
This makes it very likely that the stock price will skyrocket in the future. Thus, the new shares will be worth a lot more in the future.
There is no doubt that the demand for new shares is important for investors. However, it is equally important for the company because it ensures that the company has a robust demand for its stock. Thus, the company needs to ensure that there are a lot of people who hold its stock.
If the stock is not oversubscribed, it means that there is no demand for it. This makes it extremely unlikely that the stock price will go up in the future.
In such a scenario, the company will have to struggle to get investors interested in the stock. This makes it very unlikely that the company will be able to raise enough money to sustain itself in the future.
But often investing in IPOs during bull runs may be risky. This is because most IPOs don’t perform well in the long run.
During bull markets when, shares of fundamentally weak companies crash, and it is the investors who bear the loss.
Therefor it is always advised to check the fundamentals and balance sheets of a company before applying for the company’s IPO.
