Can IPOs Cause Stock Market Crash Or Correction? Everything That You Need To Know!

               Stock Market Crash For IPOs Hello my dear friends, I hope you all are doing well. Today I'm gonna discuss how IPOs can ca...

              Stock Market Crash For IPOs

Hello my dear friends, I hope you all are doing well. Today I'm gonna discuss how IPOs can cause a Stock Market crash or we can say a correction.

So let's start Investing With Ease.

These days as the bull market going on every single company want to grab this opportunity to get their IPO listing and some companies also want to be debt-free by raising funds through IPOs in this bull market. So need to be cautious about these things and be careful.

All these were started after the 2020 market crash due to COVID-19, and after that, we saw a tremendous bull run since now. In 2020 there were 407 IPOs listed in US Stock Market.

In 2021 there are more than 25 companies who raised funds through IPO in INDIAN Stock Market and still, more IPO's are coming. If you are shocked by reading the headline then read the full blog and you will understand why I'm telling this.

This is a common trend we see in the market, whenever the market going through a bull run at that point in time we saw more IPOs than ever. Because in that situation companies sell their shares and raise more funds than ever.

Relation between IPO and market correction:

Now how does this relates to a market crash or correction lets find out with an example:

Let us assume your family income is 50,000Rs/M, and your family has 2 children. Now education expenses of both children are 10,000Rs/M, and other expenses of your house is 30,000Rs/M. Now if there is an emergency happens and one of your children need more money this month then you have to manage and reallocate your expenses and other child's education expenses( assuming there is no more extra savings and extra monthly income).

Now same happens with the Stock market, when we see there are coming more big IPOs like NSE, LIC, PAYTM, POLICY BAZAAR, etc(All are Indian companies) then every single investor wants to invest in it and get good returns from it. 

If we took the example of PAYTM's IPO then we see they want to raise funds of 16,600Cr Rs, which means PAYTM wants 16,600Cr from this stock market. And most probably it will subscribe more than enough. (If you want to know more about IPO then visit my last blog by clicking this link ---> All about IPO, but you must read this full blog at first)

Now just like your monthly family income, the stock market normal cash flow is also a monthly cash flow. It cannot grow suddenly in just one month, now if there are lots of IPO issuing the investors will also try to invest in what may be for the advertising or maybe for the hype.

Now for this stock market cash flow will also re-allocate from one to another stock. Assume if an investor invests in HDFC BANK or RIL or Infosys or any big companies of India's Index Funds(if you don't know what is index funds then don't worry, it just a bucket of stocks which contains that specific country's biggest companies, I will write about it in detail in some other post) in a monthly basis then for more profit they will re-allocate their funds in IPOs, and for this reason, other companies can suffer for less cashflow. For this reason, the overall market may see a slowdown or market correction.

If it is a slowdown then there are no problems if we invested in Fundamentally Strong companies. But we must remember that which money regularly invests in 4000(assume) companies now for IPOs that same money will invest in 4000+IPOs.

New Investor's Impact:

Now market always adds some new investors also some investors quit the market, it's a normal process. But the problem is when new investors come only and only for the IPOs and they thought they will make a good amount of profit in a short time. They just saw the past performance and were hyped by the marketing agencies and invest in any company without any detailed analysis.

New investors are most of the time are very impatient. If the market did not meet their expectation then they quit it. 

Let's assume every month market's normal cash flow is 1lakh crore Rs, now when new investors will come for IPOs then more money will come and we can see total market's cash flow rise by 20%(assuming) then a tremendous upper move we can see in the market. This will cause great liquidity and the volume of trades will also rise. Overall this is a good sign for the market and the bull market continues.

Then more new investors also want to go with the flow and they will also invest in a various company like this and the market will grow up but it does not mean that it will be a constant growth if the market did not match the new investors' goals, then liquidity in the market will also flush out and for this reason, there will be a correction in the market.

Now if the correction continues then we can see a market crash also.

So here you can understand the situation, so investors must be cautious about their investment.

The most recent news is Patanjali will also issue its IPO listing they want to be debt-free with their IPO. they are also looking to overtake HUL(Hindustan Unilever). 

So as more IPO's are coming investors are getting good opportunities but we also have to remind the risk factors.

We have to understand the mistakes we made in a bull market, it's the result we see in a bear market.

If you want to know more about IPOs then click on this link ---> IPO

If you want to know how to allocate your assets with your risk class then click here -->Asset Allocation

Continue your investment journey. Happy investing. See you in the next blog, till then bye-bye. Thank you😀

Editor:  Sk Elaf Ahmed.