Why New Company Stocks Often Rise After Listing
Many new company stocks, called Initial Public Offerings (IPOs), often see their prices go up for a few days after they start trading on the stock market. Nithin Kamath, the CEO of Zerodha, an online brokerage, has explained some of the reasons behind this trend.
Common Reasons for Price Increases
There are a few clear reasons why IPO stocks can go up:
- High Demand and Limited Supply: When a new stock lists, there aren't many shares available for trading at first (this is called "limited free float"). But many people want to buy them, which pushes the price up.
The "Short Trap" โ A Technical Reason
Mr. Kamath also points to a technical reason, which he calls a "short trap."
Some traders try to guess that a new stock will fall in price. They do this by "short selling" โ selling shares they don't own, hoping to buy them back later at a lower price and make a profit.
But if the stock price goes up very quickly and hits its "upper circuit" (a daily limit on how much a stock can rise), these traders get stuck. They can't find enough buyers to complete their trades and return the shares they sold.
What Happens Next: Short Deliveries and Auctions
When traders can't give back the shares they sold, it's called a "short delivery." To fix this, the stock exchange steps in and holds a special auction.
- When: This auction usually happens the next day, between 2:30 PM and 3:00 PM.
- How: During this auction, shares are bought to settle the pending trades. Often, these shares are bought at a much higher price than the normal market price at that time.
Example: Meesho IPO Auction
| Detail | Price |
|---|---|
| Auction Price | โน258 |
| Market Price (at the time) | โน226 |
In the Meesho IPO example, the auction price was significantly higher than the market price, showing how these auctions can push prices up.
An Opportunity for Investors
This system also creates an opportunity for people who already own these new shares:
- If you hold these shares in your demat account, you can offer them directly during this auction window.
- This allows you to potentially sell your shares at a higher price than the regular market price.
- It also helps the exchange settle the trades smoothly.
Zerodha has made it easy for its users to take part in these auctions directly from their holdings on the app.
Mr. Kamath advises investors to understand how these auctions work so they don't miss out on the chance to potentially gain extra profits.
