Things You Need To Understand Before Investing In An IPO

What is an IPO?

IPO that is Initial Public Offering is the process of selling shares of a firm to the general public in the form of a new stock issuance.

An IPO allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the IPO.

1. What is your investment purpose

You should always be clear of idea of investment purpose before making investment decision in any IPO. They should ask why this IPO is good to invest? Its a fact, investing in an IPO for listing gains is always good idea, who doesn't want to gain capital? But it should not be the main reason for doing bidding for the IPO. You should choose a firm with solid fundamentals that can produce good returns in the future even if it does not provide listing gains.

2. Know the risk

As said above, knowing the risk factor is most important thing to consider before bidding in any IPO. Sometimes a company that is planning an IPO involves significant dangers that you may not be aware of if you only look at its operations and financials. You should carefully study its DRHP (Draft Red Herring Prospectus) to learn more about such hazards. In the DRHP, companies discuss all risk variables that may have an influence on their company in the short and long term. It may include litigation, contingent liabilities, and potential challenges to its usual company operations.

3. Know the Business of the Company

Make yourself aware the company's business such what kind of business the company is involved. Invest in the company or businesses that have a significant growth potential. A that has high-growth potential company will be able to produce regular profits and raise its sales. Avoid investing in IPOs that has unclear business activities and you don't clear idea about the company's activities in past.

4. Check the concerned company's historical records

Checking the historical records of the particular IPO you've shortlisted for bidding will help you comprehend its business plan better. The promoters of the company should be experienced and effective at propelling the company to new heights. You should avoid the IPO of the company whose promoter group and management are unstable.

If you find frequent changes in a company's management, avoid it as it can lead to poor decisions and a loss of trust among its shareholders. As a result, it is best to avoid investing in such companies'IPO.

5. Analyse key parameters to assess the growth potential

Company's financial health and growth potential can determined the by analysing critical financial data of the company. Knowing the company's debt-equity ratio might assist you estimate the company's degree of leverage. A high debt-equity ratio frequently suggests a higher level of risk in a corporation.

When investing in a firm, you should look at its Earning Per Share (EPS), cash flow, return on capital employed, and other key financial factors. Avoid investing in an IPO if its financials are poor and values are low.

6. Compare with the competitor

Another effective technique to evaluate an IPO is to compare it to its competitor group. Assume the firm planning an IPO has a strong market position and attractive financials in comparison to its competitor group, but the IPO's offer price is lower. In that situation, it may present a significant potential to profit. On the other side, if the company's IPO pricing appears to be expensive in comparison to its peer group, you may want to avoid investing in it.