IPO, an Initial Public Offering is when all the shares of a private company are sold for the first time to raise money. After an IPO, the shares of the company are available for trading and are listed on the stock exchange.
But, if you don’t invest your money strategically, you might end up with no traces in the stock market as in most cases there is a chance that the IPO prices go negative when the investors put in their money. But it is not impossible to find a good IPO to invest your money into. So, you are required to invest in fundamentally strong companies to get profits.
Now, you know some facts about an IPO, let us have a look at some tips for investing in an IPO so that you have an idea where to invest your time and money for maximum gains.
Let’s dive into some tips for investing in an IPO:
- Do Your Research
It is necessary to do basic research to find a profitable IPO. These are basically private companies that you are going to invest in and generally, the disclosure norms are not very strict in the case of private companies and sensitive information is hidden from the masses. So, even when the experts look into the companies for review, only the publicly available information is the basis of these analytical outcomes. No in-depth research is done for this analysis.
To maintain the reputation of the company, all the negative information is tried to be kept hidden. So, the red herring prospectus that is written by the company, and approved by SEBI also doesn’t provide the correct picture of the company.
Hence, it is advisable to not rely on third-party information and do your own research before investing in an IPO. Do a complete analysis of the company’s growth and developments and the future plans as well.
- Read the Company’s Red Herring Prospectus
Although the Red Herring Prospectus doesn’t provide complete information about the company and you can’t trust it blindly, it is necessary to go through it once at least.
As you invest in an IPO, you do not have any safety of capital and you become an equity holder of the company. So, it is necessary to read the prospectus so as to get an idea of how your money will be invested. You can understand the following details from the Red Herring prospectus:
- The background of the company.
- Details of all the promoters of the company.
- The exact reason that why the company had to go public.
- List of the risks involved in the company.
- The plans of the company for the money you are investing.
- It gives an insight into the opportunities for the IPO in the near future.
Also, Read- How to Pick Winning Stocks?
- Choose A Company Backed By Strong Brokers
One must keep in mind that strong brokers always bring quality companies in front of the public so as to raise funds from the market. It usually doesn’t happen that strong brokers underwrite poor companies as they have a reputation to manage in the market.
So, you must remain cautious and choose a company backed by a strong and established broker only. Also, keep in mind that it is difficult to get involved in an IPO with a strong broker, and hence it is necessary that you too have a strong stockbroker by your side for the same.
- Cutoff Price Investment
It is a game of luck when you invest in an IPO. The company always specifies a price band and you are required to bid within that price band only.
If you want that your application to get considered and you receive the allotment, you should bid at the cutoff price, irrespective of what the final allotment price is.
- Plan The Exit Strategy
It is an amazing IPO investing tip for short-term investors. You need to decide a level when you have to sell your shares and book your profits. In the case of good companies, the shares list at a high level and gradually drop in the upcoming months. So, you need to decide your exit levels prior to investing if you are a short-term investor. It is also termed flipping when you want to exit in a couple of days or weeks.
- Always Wait For Lock-in Period
A really important IPO investing tip for retail investors is that you need to understand the lock-in period. Underwriters and insiders can hold shares as they have a legal contract for the same and the prices will fall if they sell the shares after the lock-in period. So, the company’s future prospects can never be guaranteed by the brokers.
If the underwrites still hold the shares after lock-in periods, it is a good sign for the company’s future prospects.
- Stay Skeptical And Cautious
Although IPO investments are considered on the safer side, this is not the truth. There are always uncertainties due to the hidden sensitive pieces of information from the investors by the companies. So, the investors need to be cautious and skepticism is necessary. There are chances that the broker is just recommending you to invest in a particular IPO just to increase his sales. So, keep your eyes and ears open and choose what you find the best for yourself.
These were some tips for investing in an IPO. You must keep in mind that not all companies have the right reasons to raise equity capital. There are companies that do so to just pay off their liabilities. So, put your hard-earned money in a company that is involved in growth and development rather than just paying off the debts. Analyze the company details properly and then invest your money. We hope you got answers to many of your queries via this article. Just think wisely before you invest.