How to Make Money by Investing in IPO Stocks on the ASX?

  • Nov 21, 2019 AEDT
  • Team Kalkine
How to Make Money by Investing in IPO Stocks on the ASX?

New IPO stocks have been famous in the stock exchange market since years, as they steal the show- for the good or otherwise. Investors, if their risk appetite allows, are forever keen to invest in IPO stocks, right from small-cap to large-cap across all sectors in a variety of market conditions.

But what is an IPO? Abbreviated for Initial Public Offering, an IPO (often referred to as an upcoming float/ new listing) is the process wherein a company offers shares of its stock to the general public, which leads to the fact that post an IPO, the public (shareholders) have part of the company’s ownership.

TO UNDERSTAND THE IPO PROCESS, READ HERE.

Private companies work hard towards the IPO milestone, and await the right time to go public. Let us understand the checkpoints, that need to be ticked-off, signalling that the company is IPO-ready:

When Does a Company Know that it is IPO-Ready?

IPO’s are an exciting time, for companies, investors and the share market alike. Often, it is regarded as the only way for the company to get ample cash to fund a massive expansion. Let us understand the ideal time for a company for go public:

DISCLAIMER: Given the current market volatility, it is a challenge to pinpoint to exact IPO-ready time, which differs from company to company, based on their objectives. The below are generic in nature, ideally adhered to under perfect market conditions:

  • When the company is able to accurately forecast its financial revenue and related cost projections that fit its business strategy and is likely to help in winning over the confidence of institutional shareholders.
  • Once the company is successful in placing its executive team that will lead its growth and development, and the organisation structure seems to be in place, the company can consider going public, as stability and efficiency will be intact with the team.
  • Quarterly/ Annual closure of financial statements, subject to regular accounting audits are signs that the company confidently reports to the Board of Directors. These further indicate that the company is ready to be exposed to similar regulatory checks and timely reporting after going public.
  • On a public forum, where the company will be exposed to its peers, it is always advisable to set realistic valuation expectations. In the public equity market, valuations are impacted by the P/E multiples of the peers, and the overall performance as a public company establishes its valuation over the long term.
  • Going public is a huge step, a major milestone for the company and should therefore have a motive- be it to gain access to capital markets, raising additional capital, conducting M&A, offer liquidity to shareholders, funding other investments and so on.
  • Planning is key to almost every aspect of our lives. A strategic blueprint will aid the company to decide on its moves and help in the decision-making process better, after it goes public and its exposed to a number of micro and macro factors.
[ You Might Be Interested in: Five things to Keep in Mind for IPOs ]
Pros and Cons of an IPO

Just like every other aspect of business, an IPO has its share of advantages as well as disadvantages. The below table summarises a few of both:

How to Invest in IPO Stocks in ASX?

Australia’s IPO market is getting better with time and provides investors with good exposure to a broad range of companies, ranging from technology, finance, metals and mining, and other sectors that are gaining traction off late.

A few experts believe the best IPO stocks have their offer price open and close in a jiffy, with a major portion reserved for institutional investors or clients of the respective brokerage firms. However, they can be easily tapped in the secondary market.

Before investing in IPOs, an investor much get an idea of the upcoming listings of companies and acquaint themselves with their critical financial numbers and growth plans. The way the entitlement offer is structured aids in understanding the company’s stance, projections and expectations. Investors, especially the new ones, can consider aligning themselves with an IPO portal or a stockbroker for guidance, and have a broking account. However, one should note that some brokerage houses receive more allocations than others.

Another checkpoint should be about oversubscription. One may not know how many shares they have been issued until the final float date, and in the case of an oversubscription, it is possible to miss out if the necessary paperwork pertaining the IPO is not complete.

How to Make More by Investing in IPO Stocks in ASX?

Among a number of important checkpoints that one should look at before investing in an IPO, experts believe that there is an opportunity to make money from an IPO if the stock value rises on the very first day of trading and in the months and years that follow.

Individual investors may tend to lose money on a float as compared to brokerage firms or banks because these institutions spend ample amount of time studying the finances of the firms that are offering IPOs.

One should therefore avoid investing blindly in a company having unknown and untried promoters or which does not have an appealing operating and business environment. Tapping a company that has something new to offer, operating in a high-growth sector and having a reputation is always advisable as it gives a great competitive edge.

Moreover, one should always get the insight of companies where foreign collaborators have equity stakes, as this is believed to be a great way to make money.

Do you know about the Upcoming Floats on ASX?

The below table highlights the upcoming ASX floats that one should watch out for:


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