Initial Public Offering or IPO is a popular choice among Individual investors or retail investors. The Indigo Paints listed at a 75% premium over its issue price. Also, Mrs. Bector’s IPO was listed at 106.79% up. Being a retail investor, you might assume that investment in IPOs gives 100% guaranteed returns but this isn’t true. Investment in companies with strong fundamentals is a good idea but not all IPOs listed on the stock exchange lead to guaranteed returns. For example. SBI Cards and Payments Services was listed at -9.51%.
IPO or Initial Public Offering is a process in which a private company offers its shares to the general public for the purpose of raising money. After the IPO, the shares of the company are listed on the stock exchange and are available for the purpose of trading.
In order to understand which IPO is worthy is our money and time, we have jotted down the top IPO investment tips.
1. Conduct Thorough Research –
It is essential to conduct thorough research before investing in an IPO. When you plan to invest in an IPO, you are putting your hard-earned money into a private company. These firms do not have strict disclosure norms and may hide sensitive data from the general public.
When the self-proclaimed experts review the IPOs, they only analyze the information that is available for the general public and does not carry out detailed research into the financials of a company.
The Red Herring Prospectus gives a good idea about the company and is also approved by the SEBI. But the company issues out the prospectus and may hide all the negative information from the public to maintain its reputation in the market.
Therefore, before you plan to invest in an IPO, you must conduct thorough research without depending upon a third party. Analyze the company based on its performance against peers, future growth plans, and overall sector analysis.
- Scrutinize the Management and Promoters
Some promoters may use IPO as an exit window. Therefore, before investing in an IPO, you must do a background check of the promoters and their experience in the company. Also, read about the management of the company. The quality of management differentiates a poor growth company from a high growth company. An efficient management team effectively manages a company in times of crisis and creates wealth for the investors. Therefore, an important IPO investment tip is to invest in companies with strong management.
- Read the Red Herring Prospectus Carefully
You become an equity holder of the company after investing in its IPO and there is no safety of your capital. Therefore, reading the prospectus carefully is essential to understand how your money will be invested by the company. You can obtain the red herring prospectus from
- SEBI website
- The website of the company
- Stock exchange website
- Magazines and newspapers
Once you read the prospectus, you will be aware of the:
- Details of the company promoters
- Background of the company
- Reasons for going public
- Risks involved in the company
- The future plans of the company using your money, etc.
- Find Out Where your Funds are Invested
The Red Herring Prospectus will give you an idea of how your funds are being utilized by the company. If a company is raising funds to repay its liabilities, then is a bad signal for the investors like you. But if they are using your money for the purpose of research and expansion, then investing in its IPO can turn out to be a wise decision for you.
Invest at the Cutoff Price
IPO investment depends largely on luck. When you are investing in IPO, you are supposed to bid on a price that is within the price band specified by the company. In order to ensure that you get an allotment, you should bid at the cutoff price. This way your application will be considered irrespective of the final allotment price.
- Invest in the IPOs that are Backed by Strong Brokers
Brokers are responsible for managing the IPOs. Big brokers have a reputation to maintain and they underwrite IPOs of only the fundamentally strong companies. Small brokers can be easily bought by the companies and they may end up underwriting poor IPOs. Therefore, when you invest in IPOs, choose the one backed by the strong reputed brokers. But don’t rely on a broker alone. Do your own research and then put your hard-earned money into a company.
- Plan an Exit Strategy
An exit strategy for the short term is essential. You must decide at which levels you will sell your shares and book your profits. Usually, the shares of good companies list at higher levels and then eventually drop in the next few months. Therefore, if you are a short-term investor and willing to exit in a couple of days, you should pre-decide your exit levels. This is called flipping. Also, setting up stop-loss and booking profit is also important as all IPO investments do not work in the favor of retail investors.
- Company Valuation is Important
As a retail investor, it isn’t easy to find out the correct valuation of a private company. The investment bankers and underwriters try evaluating the valuations on the basis of the returns and management. You should also set up valuation benchmarks to judge the company against its peers.
Lock-in-period is an important factor in IPO investments. The insiders and underwriters have a legal contract for holding the shares. The share prices start falling if the underwriter starts selling shares after the lock-in period. This is an indicator that the brokers are not hopeful for the future of the company. On the same lines, if the underwriter continues to hold the shares even after the lock-in period, then it’s a good sign as it shows that the broker is confident of the future prospects of the company.
- Start asking Questions
IPO investments are far from safe investments. As there is limited information available in the public domain, the investors generally rely on the advice of the brokers for investing in the IPO. So, if your broker is suggesting you an IPO, then be skeptical and ensure that the broker is not recommending the IPO only to make a sale. Some brokers might try to fool the investors into buying the IPO as the High Net Worth Individuals ( HNI ) and institutional investors are not willing to investing in the particular IPO.
Initial public offering or IPO is a smart way for companies to raise equity capital. But some companies use it for wrong purposes. They may use it to raise funds to pay off their liabilities. In this case, your hard-earned money will be used to clear the debts of others and not for the growth of the company.
Therefore, it is important to analyze the hidden information of the companies before investing in IPO. Apart from the research, you also need an unbiased broker for researching and recommending an IPO for the best investment. As an investor, you should be skeptical before investing in an IPO and do thorough research before putting your money in any company.