Types of IPO Investors

Types of Investors in IPO - The Fundamentals

You can use an IPO to raise a lot of money very quickly, but investors are not always as invested in your success as you might expect them to be. They see an IPO as a financial opportunity without any emotional ties, so it will not matter to them if things go wrong with your company.

The first type of investors is the ones that invest in the pre-IPO (initial public offering) stage. The investors in this stage do not have any equity stake in the company. They purchase shares, hoping to profit from the stock market after it goes public.

The second type of investor is the one that invests in the IPO (the initial public offering). These investors can earn up to 60% more than what they paid for their shares when they go public.

The third category of investors is those that invest in private equity after the IPO. Such investors can earn up to 100% more than they paid for their shares.

The fourth type of investors is hedge funds, venture capitalists, and angel investors. They invest in companies with many years of experience and a solid history behind them. These investments provide stability and security for a start-up company but can also be risky as there is no guarantee about how much money you will make or lose.

How Do You Determine Investor Type in IPO?

Since economic reforms were initiated, the Indian capital markets have witnessed a phenomenal transformation over the last two decades. Various structural changes in the economy, the maturity of the financial markets, and the emergence of new segments have led to a sharp increase in the number of primary market transactions.

A few years ago, large companies from the traditional business sectors such as textiles, engineering, primary metals, chemicals, and fertilizers undertook IPOs.

The situation has changed dramatically today, with new companies coming up in every economic sector. The types of investors that participate in primary market transactions have also changed significantly. This article analyses some of these changes and looks at the changes in the nature and roles of intermediaries (brokers, merchant bankers, and investment bankers) in primary market transactions over time.

List of Types of Investors in IPO

Many types of investors in India are interested in investing their money in the Indian market. They can invest any amount of money in the IPO market, and the SEBI sets no minimum limit for investment.

The following are the types of investors:

Retail Investors
The general public invests small amounts of money in the stock market. They usually invest through SIPs (Systematic Investment Plans), where they invest a fixed amount of money at regular intervals.
These individuals invest in the IPO for their personal investment goals and objectives. They invest in IPOs as an investment avenue, not as a business. They may be retail customers of financial institutions, or they may be individuals who have chosen to invest in IPOs as a part of their portfolio allocation strategy.

Institutional Investors
These are significant funds that invest a large amount of money. They manage a corpus measured in billions or even trillions of rupees. Examples include Mutual Funds, Insurance companies, Pension funds, and Foreign Institutional Investors (FIIs).

These are Non-Banking Financial Companies (NBFCs), Mutual Funds and Venture Capitalists, Investment Banking Firms, Insurance Companies, Pension Funds, Wealth Managers, etc. They provide funds to companies either through IPOs or otherwise to obtain a share of their growth potential. Institutions are also called "Angels" because they support businesses early by providing capital and expertise.

Qualified Institutional Buyers (QIBs)
QIBs are defined under SEBI regulations as entities who invest in IPOs for long term investment horizon and hence have to qualify on specific parameters set by SEBI and Stock Exchanges such as minimum net worth, net profit, minimum turnover, etc. They include Mutual Funds, Insurance Companies, Pension Funds, etc.

Angel Investors
They are wealthy individuals who invest their capital in a company they feel is worthy and has good potential to grow and make a profit for them.

Venture Capitalists
These are also known as VCs. They are professional investors who have expertise and experience investing in start-up companies with high growth potential for commercialization or expansion purposes.

Wrapping Up

Most Investors are interested in IPO. The only thing is they are not aware of who is the best bet and whom they can trust upon. The most straightforward advice is to invest in an investment banker whose credibility has been proven through successful listings by earlier clients.

If a company has higher market capitalization, it will attract more investors. But mind you, there are some risks associated with it, such as liquidity and deal risks like undisclosed information, which can lower a company's market value.