On What Factors Should An Investment In An IPO Be Based?

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At a time when several companies are hitting the primary market for the first time to raise fresh funds, investors may be lured to take bet on these issues. So, before parking your hard-earned cash in these IPO, you definitely need to consider on these fronts.

On What Factors Should An Investment In An IPO Be Based?

1. Company's Line of Business and Financial Performance: As with other equity investment options kept open for subscription other than fixed-return instruments, gains from any financial bet depend largely on the company's business as well as the financial performance in past which also to an extent has a bearing on the future earnings of the company.

For eg: In the recent AU Small finance Bank IPO, brokerages had been largely recommending the issue on the back of the fact that the company caters in areas not otherwise catered to by large financial institutions.

2. Fundamentals of the Company and Overall Industry Outlook: With the overall gloomy market sentiment coupled with weak company and industry fundamentals, the investors may be at high risk when making investments in IPO issue.

3. Objective of the Issue: Investors considering investment in IPO issue should also factor in the objective of the issue as well as the future roadmap of the company, as to where the company intends to utilize the mopped up funds.

4. Valuations and More Specifically P/E ratio: Price to earnings ratio or P/E ratio provides for a comparison between the company's stock price and earnings and is calculated by dividing the stock price by earnings per share. Another ratio that can be considered for a new entity is return on equity. Some of the companies are also seen to come up with an overvalued IPO issue in such cases brokerages advice not to invest at high price and instead take in the stock in one's portfolio when the stock hits some lows upon listing.

5. Comparison of Issue Price with other listed stocks of the same basket: If the issue price decided for the IPO is kept at a price higher than the market price of other listed stocks of the similar basket, there is left little or no room for the stock to be listed with gains.

6. Rating or Grading: IPOs like other financial instruments are rated: And though a good rating can also be a deciding factor for the investment decision. One should not definitely be going by this tenet alone, as there have been instances in the past where despite a good rating, company's have withdrawn their IPO issue.

7. Oversubscription for a issue should also be looked upon: When coming up with an IPO issue, company offers a particular number of share for sale or subscription. Furthermore, for each category, ie. Banks, institutional investors, domestic institutions and retail investors it sets aside some percentage allocation that would be done.

Read here, how you sometimes fail to get shares alloted to you,despite making the IPO application, here.

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Story first published: Thursday, June 29, 2017, 14:29 [IST]
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