If you’ve observed the Indian stock market closely, you might have noticed a recurring trend—companies tend to launch Initial Public Offerings (IPOs) when the market is on an upward trajectory. However, when the market turns bearish, the number of IPOs dwindles significantly.
But why does this happen? Is it just a coincidence, or is there a deeper reason behind this trend?
With years of experience analyzing financial markets, I have seen how IPO activity aligns with market cycles. Let’s break it down in simple terms and understand why IPOs favor bull markets.
Understanding IPOs and Market Trends
Before diving into the reasons, let’s first clarify what an IPO is.
An IPO (Initial Public Offering) is a process where a company raises capital by selling its shares to the public for the first time. Businesses go public to fund expansion, reduce debt, or invest in new projects.
Now, when is the ideal time for a company to go public? The answer lies in market conditions.
A bull market is characterized by rising stock prices, strong investor confidence, and overall positive sentiment. In contrast, a bear market sees declining stock prices and cautious investor behavior.
Now, let’s explore why IPOs are more prevalent in bull markets.
1. Higher Valuations Mean More Capital Raised
One of the biggest reasons IPOs flourish during bull markets is valuation. When stock prices are rising, investors are more willing to pay higher prices for shares. This allows companies to secure better valuations and raise more funds.
For instance, during the 2021 bull run, Indian companies such as Zomato, Nykaa, and Paytm launched IPOs at premium valuations, successfully raising significant capital due to heightened investor enthusiasm.
In a bear market, valuations tend to decline, making it harder for companies to achieve their desired pricing. As a result, many firms delay their IPO plans until market conditions improve.
2. Strong Investor Sentiment and Liquidity
Investor sentiment plays a crucial role in the success of an IPO. In a bull market:
- Retail investors feel optimistic and are more likely to participate in new stock listings.
- Institutional investors, such as mutual funds and foreign investors, have strong cash inflows and actively seek new investment opportunities.
- IPOs often experience high oversubscription, where demand for shares exceeds supply.
During a bear market, however, investors become risk-averse. Companies may struggle to attract buyers, leading to lower subscription rates and weaker IPO performance.
3. Better Listing Gains Drive More Participation
Many investors subscribe to IPOs with the hope of listing gains—the profit made when a stock debuts at a higher price than its issue price.
- In a bull market, strong demand often results in stocks listing at a premium.
- Retail investors and traders actively apply for IPOs, anticipating quick profits.
- Positive media coverage creates a cycle of excitement, encouraging more companies to go public.
In contrast, during a bear market, IPOs struggle to generate strong listing gains. Some stocks even debut below their issue price, discouraging investor participation.
4. Promoters and Early Investors Seek Maximum Returns
Company promoters and early investors, such as venture capitalists and private equity firms, view bull markets as the perfect opportunity to exit at high valuations.
For instance, many tech startups went public during the 2020-2021 bull phase because their early investors wanted to capitalize on peak market sentiment.
During a bear market, these stakeholders often hold off on selling their stakes, preferring to wait for better conditions to secure higher returns.
5. Favorable Economic Conditions and Government Policies
Bull markets are often fueled by strong economic growth, government reforms, and favorable business environments. These factors boost investor confidence and encourage IPO activity.
For example:
- The 2020-2021 bull run was driven by low interest rates, post-pandemic recovery, and increased retail participation.
- Government policies, such as support for startup listings and public sector disinvestment, further contributed to IPO momentum.
Conversely, bear markets are often accompanied by economic slowdowns, inflation concerns, and policy uncertainties—factors that deter companies from going public.
6. Media Influence and Public Perception
The media plays a significant role in shaping investor sentiment. When the market is bullish, news outlets are filled with reports of successful IPOs and impressive listing gains.
As a result:
- Retail investors, including first-time participants, get drawn into the IPO frenzy.
- Success stories fuel positive sentiment, leading to an increase in IPO applications.
During a bear market, however, negative financial news dominates the media, discouraging retail investors and reducing overall IPO interest.
Final Thoughts: Should You Invest in Every Bull Market IPO?
While IPOs tend to emerge in bull markets, not all IPOs guarantee good returns. Some companies take advantage of market optimism and launch overpriced IPOs that may not perform well post-listing.
For instance, Paytm’s 2021 IPO generated significant hype but later saw a sharp decline, leading to losses for many investors.
To make informed investment decisions:
- Analyze the fundamentals: Evaluate the company’s financials, growth potential, and competitive position.
- Avoid blind hype: Not every highly subscribed IPO is a good investment.
- Think long-term: Some IPOs may be good for short-term gains, while others are better suited for long-term growth.
Bull markets present great opportunities, but investing should always be based on research rather than emotions.
Next time you see an IPO surge during a bull market, you’ll understand why it’s happening—and whether you should participate or remain cautious!
What’s your experience with IPOs? Have you benefited from them, or do you prefer to wait and observe? Share your thoughts in the comments below!