What is Percentage Gain in IPO?

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  • 01 Dec 2023
What is Percentage Gain in IPO?

Key Highlights

  • Percentage gain in IPO is a metric that evaluates the return on investment when you invest in an IPO.

  • It is a more standardised measure of profitability as compared to the return on investment (ROI).

  • Percentage gain considers factors like dividends, brokerage fees, and also capital gains taxes.

An Initial Public Offering is the first sale of shares of a company. After that, it gets listed on the stock exchanges. Selling shares for more than the purchase price results in a profit for the investor. On the other hand, if the purchase price is higher than the selling price, the investor loses money. Buying and selling at the same price means that the investor has neither gained nor lost money.

The percentage gain is often used to determine the profit or loss from an initial public offering (IPO). Investors can evaluate two assets using the percentage gain over a predetermined time period, such as a year.

The simplest method for figuring out the profit from an investment is to use percentage gain. To illustrate this, let us look at an example.

Assume that an investor has made investments in Asset X and Asset Y. Asset X has a cost of Rs. 500, but Asset Y has a purchase price of ₹ 1500. Both investments generated profits of Rs. 250.

Even though the gain amounts on these two assets are comparable, Asset X has provided a higher return than Asset Y when we compute the gain %. The profit percentage for Asset X is 50%, but the profit percentage for Asset Y is 25%.

Therefore, if an investor had put in more money in Asset X, he could have made a much larger profit. Thus, figuring out the gain % is a quick and easy way to analyse the performance of assets.

The % return on your investment is easy to figure out mathematically. But initially, you must compute the gain before you can get the percentage gain. The following is the formula to determine gain:

Gain = Selling price – Purchase price Example of Percentage Gain Let's say you spend Rs. 500 on a stock at the start of November. When the market is performing well after six months, you choose to sell the stock at Rs. 800, which is its current worth. Based on the calculations, your potential return on investment is:

Gain = Selling price – purchase price Gain = Rs. 500 - Rs. 800 Gain = Rs. 300

Formula:

Calculating the percentage gain involves dividing the difference between the buy and selling prices by the percentage of the purchasing price. When represented mathematically, the formula is:

% Gain = [(Selling price – Purchase price) / Purchase price] x 100 Continuing with the example above,

% Gain = (Rs. 300 / Rs. 500) x 100 % Gain = 69%

Percentage gain helps investors measure how beneficial investing in a stock would be.

Some variables may affect the percentage gain in addition to the return and amount invested. They make a difference in the overall results. So, they should be considered when calculating the gain percentage. For instance, the investor pays brokerage costs in addition to receiving dividends. The following are the key factors investors must consider.

1. Dividends

The money a firm gives its shareholders as payment for holding its shares is known as a dividend. The company's board determines the dividend percentage. It often varies from 2% to 5% of the stock value. The distribution of dividends usually occurs based on the number of shares an investor holds.

You will earn Rs. 85 or receive a 17% return on your investment if you purchase a stock for Rs. 500 and sell it for Rs. 585. Additionally, you have to factor in the announcement of a 7% dividend distribution on the company's shares when calculating the gain percent. As a result, the estimate will be like this:

ROI = Selling Price (Rs. 585) - Capital Investment (Rs. 500) + Dividend (Rs. 35) divided by 100

ROI = 120/500 = (120/500 x 100)% = 24%

ROI (percentage gain) = 24

2. Brokerage Fee

Working with an established and certified stockbroker is essential if you want to invest in bonds, equities, or other assets. Moreover, there will be a brokerage charge associated with each transaction, regardless of whether you are buying or selling.

Brokerage fees are usually levied as a percentage of the total trading volume. However, some brokers charge a set brokerage cost regardless of your trading volume. Suppose you paid Rs. 20 as your brokerage costs.

It will affect the formula for gain %, and the resultant equation will be like this:

Percentage Gain = Selling Price (Rs. 585) - Capital Investment (Rs. 500) - Brokerage Fees (Rs. 20) divided by Rs. 500

Percentage Gain = 13%

3. Capital Gain Tax

Depending on how long you have owned or possessed an item, you may have to pay capital gains when you sell it.

If you sell the asset within a year of purchasing it, you would have to pay a larger short-term capital gain tax than a long-term capital gain tax. If you sell an asset after owning it for more than a year, you will not be required to pay short-term capital gain tax. In such circumstances, you will be required to pay the long-term capital gain tax. It is usually a bit lower.

Conclusion

Knowledge about the percentage gain is crucial to understanding the world of investing. It helps you know how much return on investment you shall earn by investing in an IPO. So, you can calculate the profits gained by investing in a stock going for an IPO. It is a more standardised method as compared to the return on investment (ROI). Percentage gain takes into account factors like dividends, brokerage fees, and capital gains tax. So investors can obtain a comprehensive picture of the overall returns.

FAQs on Percentage Gain in IPO

Percentage gain helps to understand the market’s perception of a company’s value. A higher percentage indicates strong demand, while a low percentage shows low demand.

Many factors like strong investor demand, favorable market sentiment, and an appropriate offer price can lead to a higher percentage gain.

A high percentage gain is usually considered a good sign. However, too high percentage gain may suggest that the IPO is underpriced. So, a company may miss a good opportunity.

Yes, a company going for an IPO can have a negative percentage gain, especially on the first day of trading. This occurs if the investors are not very interested in the IPO.

A good percentage gain is a good indication of a company’s success. Yet. it doesn’t guarantee the success of a company in the long run. You must consider the overall performance of a company depending on various metrics.

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