Amid a bull run on stock markets, the initial public offering (IPO) market is witnessing a fierce storm. The list of companies seeking to make stock market debut is only growing longer to capitalise market exuberance. Adding to it, low interest rates and a recent surge in special purpose acquisition companies (SPACs) have also boosted IPO activities.
Nowadays, IPOs have become a good investment avenue for investors. The IPO market is a great way to make money in a short time as it offers high returns. By investing in IPO, people may sell shares at the point of profit on a listing day or thereafter.
Investment in stock markets is a challenging task as it involves high risk, but at the same time, it also offers high reward. There is always a risk of losing money in a stock market, but people never fear to invest in some valuable assets, such as IPOs shares, to satisfy their appetite for higher returns.
However, making money in an IPO market is not as easy as it sounds. There are several risks associated with it which need serious attention from any investor. To invest in IPO, investors first need to understand the concept of IPO.
We at Kalkine help investors better understand the concept of IPO, which would help them in picking the best IPOs.
What is an IPO?
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As the name suggests, the term Initial Public Offering (IPO), also referred to as ‘going public’ with respect to a company, is a process to raise money by floating shares to the public though a particular stock exchange. The IPO allows a private company to sell its shares to a large pool of investors, including institutional and retail investors for the first time. This provides an opportunity to small investors to buy an ownership stake in a young company and take exposure in its potential growth.
It is a fund-raising method used by large companies to list their shares on a stock exchange. A firm’s decision to go public is partly driven by the need for funding for future growth, repayment of debt or even for working capital. It also helps a company attain a potential premium value for its assets, business model and future growth.
What should you look before investing in IPOs?
While investing in IPOs can be a great way to grow your money, there are certain factors that one needs to consider before buying a company’s shares. Here are some key points to remember while investing in IPOs.
Credibility and the track record of a company: Before making an IPO investment, one must check the credibility and the track record of the company. This includes analysts’ view, brokerage ratings, industry outlook, financial performance, and the Peers review.
Market potential: Whether it’s a product or a service, market potential of a company determines its future outlook in a given business environment. Usually measured either by sales value or sales volume, it is an important parameter to analyse the size of an industry as a whole to determine the potential for companies. If the market is large and there is limited competition, new player may find it easy to gain market share or grow their revenue through sales.
Financial performance: This is one of the most important factors to evaluate how well a company can use its assets to generate positive return. It is a subjective measurement of a company’s assets, liabilities, equity, expenses, revenue, and overall profitability. These financial indicators show the financial health of a company.
Management quality: To assess this aspect, an investor needs to read IPO prospectus carefully. An efficient management team helps a company to sail through challenging times. A good team also helps business to take tough decisions and alter its business models to achieve the overall objective of the company.
Offer price: It is important for the investors to look at the offer price of an IPO to evaluate if it meets their investment criteria. It is the per-share value at which shares are issued to public before the start of their actual trading at a stock exchange.
How to Invest in an IPO?
Once you have resolved the queries mentioned above, you can simply buy IPO shares through a stockbroker or a brokerage account. To buy shares, you need to fill an application form, which can be found in the prospectus. It is generally available on a company’s website or it can be obtained from brokerage house, which is managing the IPO.