IPO vs SME IPO: Should You Invest in SME IPO?

The stock market is full of opportunities and among them, Initial Public Offerings (IPOs) are one. But all the IPOs are not the same. Apart from the usual Initial Public Offerings for mainboard companies, there are also SME IPOs, which are IPOs cut out for Small and Medium Enterprises. Here, you will know the detailed differences between IPOs and SME IPOs and what kind of investment choice it is for you to choose SME IPOs.

Understanding IPOs and SME IPOs

An IPO is the process by which a private company goes public by offering its shares to the general public for the first time. This event marks a significant milestone for a company, allowing it to raise capital from public investors. They are listed on the NSE and BSE in India.

In contrast, an SME IPO works on the same basis where a company goes public to raise funds. However, they are specifically for small and medium-sized companies. These IPOs are listed as NSE Emerge and BSE SMEs in India.

Key Differences Between IPOs and SME IPOs

Let’s look into the major differences between IPO and SME IPO:

1. Company Size and Market Capitalization:

IPO: IPO involves large, established corporations with sizable market capitalizations.

SME IPO: Pertains to smaller companies with lower market capitalizations. These businesses are usually in their growth phase and lack the extensive experience of larger firms.

2. Regulatory Requirements:

IPO: Regulated and having to disclose information and meet legal formalities that make them more transparent.

SME IPO: Small businesses are still regulated but this is done to allow them certain measures of flexibility since they are comparatively smaller than big companies.

3. Risk and Return:

IPO: Generally considered lower risk for investors compared to SME IPOs, which often means lower potential gains.

SME IPO: Involves higher risk due to the smaller size and limited experience of the companies. However, this higher risk also presents the potential for greater returns.

4. Investor Base:

IPO: It goes well with most institutional and retail investors in the market.

SME IPO: Mainly appeals to retail investors and high-net-worth clients.

Pros of Investing in SME IPOs

Let’s discuss the advantages of investing in SME IPOs:

1. High Growth Potential:

SMEs, being in their growth stages, offer significant value or returns if they succeed. Early investors in successful SMEs can greatly benefit from this potential.

2. Portfolio Diversification:

Investing in SME IPOs provides an opportunity for greater diversification compared to large company shares.

3. Support for Small Businesses:

By investing in SME IPOs, you contribute to the growth and development of small companies that play a crucial role in the economy.

4. Access to Emerging Markets:

SME IPOs often represent companies operating in niche or emerging markets, providing investors with the opportunity to gain exposure to innovative industries and trends. This can lead to significant returns as these markets expand and mature, offering a unique investment avenue compared to established sectors.

5. Attractive Valuations:

SME IPOs may be offered at more attractive valuations compared to large-cap stocks. This is due to their relatively low visibility and liquidity. Investors can capitalize on these lower entry points, which may result in substantial gains if the companies perform well and their valuations rise over time.

Should You Invest in SME IPOs?

Deciding whether to invest in SME IPOs depends on your risk tolerance, investment goals, and market knowledge. If you are willing to take on higher risk for the potential of higher returns and believe in the growth prospects of a particular SME, investing in SME IPOs could be a suitable choice.

However, it is essential to conduct thorough research, analyze the company’s financial health, and understand the market dynamics before making any investment.

To invest in an SME IPO, you need to have a demat account. A demat account allows you to hold and trade shares in electronic form, simplifying the investment process. With a demat account, you can easily participate in upcoming IPO, including SME IPOs, and manage your investments efficiently.

Final Words

Both IPOs and SME IPOs offer unique opportunities for investors. While IPOs provide stability and lower risk, SME IPOs present higher growth potential and diversification benefits. Carefully assess your investment strategy and consider the pros and cons before deciding to invest in SME IPOs.