Points To Keep In Mind Before Investing In IPO

IPO market is heating up and with listing gains frenzy, you as a first time investor may also be thinking of making some reasonable gains from the likely issues.

Experts Caution Retail Investors Citing IPO Investment To Be The Most Risky Investment

The details of the company launching the IPO which is to still make its way to the Dalal Street are not as revealed as that of a listed company. So, investors trying to take position in a certain IPO should do all possible research including extract details on the company's promoters, objective of the IPO issue as lay-men shall be at a difficult position to conclude as to whether or not the issue is reasonably priced.

Also, one needs to look out for the background of the company before risking away their hard earned money.

For such and other details reading the fine print provided in the Prospectus shall be highly important as it comprises all such information as company's line of business, financial statements, issue objectives, management commentary etc.

Comparative study of companies from the same sector needs to be done:

This is to understand how other peer companies from the same sector are commanding a valuation. And for companies with a business that has no listed competitor one can simply make a judgement based on PE ratio and RoE. Price to earnings ratio of a stock is arrived at by dividing the share price of the current stock by the earnings per share.

Why so much excitement currently in the IPO market?

This is given the enormous liquidity as well as the enormous recovery made in the secondary market from March lows, which is aiding the sentiment. But interestingly, some of the sector specific IPOs say for instance Likhitha had to lower its IPO issue price band as well as extended its IPO with less takers initially and also even despite the approval from the SEBI, companies have been showing reluctance to hit the markets. Notably, SEBI has also extended the timeline for IPO by another six months.

And now as the capital markets and the larger Indian economy are not showing similar trajectory, there is expected a correction in the markets which since the March lows have had a remarkable rally but this as per experts is bound to fade as the markets will likely catch up with the larger economy.

Conclusion

So, precisely do not base your investment decision on some of the elite group of promoters backing the IPO or good brokerage firms behind the issue. The issue should be bet on considering the growth potential in the company's line of business as well as your risk profile. This is as investment decision taken basis the company's fundamentals shall reward in the long run despite the current market trajectory.

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