The Domino Effect of IPOs on Market Dynamics
Introduction
Recently, IPOs have gained momentum among companies to raise funds, achieve growth, increase visibility, etc. When a company goes public and issues shares in the market, the demand-supply dynamics shift, the industry is impacted and so is the stock market.
Let us see what the short-term and long-term effects of IPOs are.
Short-term vs. Long-term Effects
As soon as a company launches its initial public offering, it affects the market, the company, and the investor sentiments. While some effects are short-lived some have long-term effects.
Short Term Effects
- Impacts the demand and supply of shares
- Liquidity in the market increases
- Brings stock price volatility
Long Term Effects
- Impacts the economy with its success or failure
- The company’s capital, decision-making process and operations are impacted
- Impacts the industry to which the company belongs
An IPO also affects investor sentiments in the market which can be the driving factor for success or failure.
Market Sentiment and IPOs
The success or failure of an IPO affects investor sentiments greatly. Also, in a bullish market, the investors are positive and ready to receive new offerings.
In such cases, when the IPO is introduced, it gives the investor sentiments a boost and instils confidence in the market and the company. A surge in the stock price after the initial public offering encourages investors to buy the shares of that company and earn higher returns.
On the contrary, if after the IPO the company shares fail to perform, it can discourage the investors from further investment, leading to a further downfall in the market conditions.
The success or failure of an IPO has ripple effects on the industry it belongs to and on the entire market.
The Ripple Effect: How One IPO Can Affect Related Sectors or the Entire Market
It is important to know that not all IPOs impact the market and investors in the same manner. Many factors play a role in determining the impact. However, an IPO of one company has a ripple effect on the sector that it is part of. A successful IPO of one company encourages others to think about coming out with their IPO to raise capital and go public.
Similarly, if one IPO fails the other companies in that sector may also step back from the idea of raising capital from the market which can lead to reduced competition within the industry. IPOs also cause market volatility in the short run. It leads to an increase in the share supply which in turn, affects the share prices in the market.
Listed IPOs: Navigating Through Newly Public Companies
Once the IPO is over in the primary market, the shares of that company are now listed on stock exchanges and ready to be traded in the secondary market. Listed IPOs can be bought and sold by any stock market investor. The mainboard IPO is listed on NSE or BSE while SME IPO can be listed on one stock exchange only.
Conclusion
Investors looking at creating wealth from the stock market must understand how the market dynamics work, what factors influence IPOs, how IPOs can benefit them, and how to choose the right company for an IPO purchase. Having a sound knowledge of the IPO helps you to make informed and fruitful decisions.
Reference links:
https://fastercapital.com/content/Stock-Market–How-IPOs-Impact-the-Stock-Market-Dynamics.html
https://www.tandfonline.com/doi/full/10.1080/23322039.2024.2303896
https://www.businesstoday.in/markets/ipo-corner/story/navigating-wealth-creation-unveiling-the-dynamics-of-ipos-409257-2023-12-13
