- An IPO is when a company sells its shares to the public for the first time.
- Looking for IPOs that can be a good investment is a tough task.
- Reading prospectus, understanding a company’s business, knowing its financials and associated risks can help the investors in taking a viable decision.
An Initial Public offering (IPO) is when a company offers its shares to the public to raise funds. Both institutional and retail investors can participate in the IPO.
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Investors are lining up for IPO offerings in 2021 amid bullish market sentiments as economies of various countries recover after COVID-19 disruptions. However, IPOs do not give assured returns and can come with unique risks.
Here are 10 points to keep in mind before investing in an IPO.
- Read the Prospectus: A prospectus shows the risks and opportunities for the Company and how the money raised will be used. An investor must read Red Herring Prospectus, which depicts all information of the Company’s account, management qualifications, growth plans, etc.
- Know how the funds will be invested: Understanding the business of the Company is an important task before investing in its IPO.
A high-growth company will let the firm make consistent profits and increase its revenue, while the companies whose business activities are not so clear must be averted. Detecting the company’s ability to catch market share and survive ahead can help considerably in making investment decisions.
- Look into the Company’s financial health and valuation: Financial performance depicting its revenue and profit metrics must be checked to figure out if it is a good or a bad investment.
Apart from checking financial health, investors must also check valuations as the offer price may be undervalued, overvalued or fairly valued contingent on industry factors and profit ratios.
- Do a peer review: A good peer review is important before making an investment in the company. An investor must study other listed firms within that specific sector and compare their financials.
There can be a case where the company that is offering an IPO has good financials and market share as compared to its competitors, but the offer price for the IPO is lower. An investor has a big possibility to make money in such a case.
- Look for Risk factors: The company can also carry risks for which an investor must read its prospectus as it gives all the information about the potential risk factors that could arise in impacting the business in the short and the long term.
- Look for contingent liabilities: There can be contingent liabilities if the Company has gone under any legal proceedings in the past or ongoing on patents/rights issue. An investor must also watch out for any fraudulent/misleading activity that the firm engaged in the past if any.
- Take a look at the subscription level- An investor must look if the IPO has been oversubscribed or undersubscribed. A low level of subscription shows that the shares’ issuance is not seen as a strong proposition by investors. A strong listing must also be avoided, as due to the listing gains which can come up due to oversubscription, the share may go down the issue price.
- Check Company’s promoters and management: Investors must also check and research a bit on a company’s managers and promoters who are running it and are the faces behind its operations and functions.
- Wait for the lock-in period: The lock-in period is the period when the stockbrokers/underwriters are not able to sell a company’s shares and can vary from 2 months to 24 months. If the brokers continue to hold the stock even after the lock-in period, it implies a viable future for the Company.
- Make a plan for an exit: Short-term investors must have an exit strategy with them. An investor must also take a decision on loss levels if IPO investments do not work positively.
Looking for the companies that have potential is not an easy task. An investor must evaluate and pick the company as per their financial goals and investment objectives.