Investing in Initial Public Offerings (IPO) can be rewarding. Many companies that go public see a significant growth both on their listing day and in the long run. However, it is important to know that it is not mandatory that every IPO performs well. It happens that sometimes IPOs fail to give the expected returns. In the current time, we can see that Indian stock market is flooding with IPOs. It becomes difficult for an investor to decide whether to apply for the IPO or not. Let us give you a guide so that it becomes a bit easy for you to understand if you should invest in IPO or not. For this, we have mentioned a few steps that could help an investor understand.
Steps to follow for determining whether to invest in the IPO:
Know Yourself: It’s essential to clearly define your investment goals before participating in an IPO. Avoid borrowing to invest as there is no assurance of returns from it. If the investment returns in a loss, the money is gone and you will also have to factor in the interest costs on any borrowed funds. It is better to use your own savings for IPO investments rather than taking any additional financial risk.
Analyze your Risk Appetite: Analyzing your risk appetite is a crucial step before making any type of investment, especially in volatile assets like IPO. Risk appetite refers to the level of risk that you are willing to take in order to achieve your investment goals. It is influenced by factors like your financial situation, investment goals, understand emotional comfort (in case of losses), and evaluate market knowledge and experience.
Conduct your own analyses: Whenever there’s an IPO, stock market experts often publish a research and advisory report. However, these opinions can be subjective or influenced by personal biases and may not always be accurate about the true nature of the offering. Therefore, it is important not to rely solely on these reports. Instead, take time to do your own thorough research before making any decisions. As part of this process, be sure to compare the company with its competitors to get a clearer picture of its performance.
Avoid getting swayed by the excitement: Keep in mind that the company going public along with its investment banks, has invested significant resources into the IPO process. They will likely try to create a buzz and present the offering as highly desirable and profitable. It’s important to conduct your own research and gather unbiased information from official sources, such as the stock exchange websites.
Always review the prospectus: The Red Herring Prospectus (RHP) is a publicly accessible document that every company filing for an IPO submits with the Securities and Exchange Board of India (SEBI). RHP contains a detailed information about a company’s background, business operations, financials, strengths, risks and specific details of the IPO. You can find this document on several platforms, including the company’s website, SEBI’s website and the Stock Exchange’s websites. As an investor it is essential to carefully review the prospectus before making any investment decision.
Understand where your money is being invested: Understanding how a company intends to use the funds raised from the IPO can help guide your investment strategy. This information is typically mentioned in the RHP. Ideally, the company should use the funds raised from IPO proceeds to grow its business, acquire assets or invest in research and development. However, if the funds are primarily intended to pay off debts, it may be a good idea to rethink investing in that IPO.
Invest in IPOs backed up by reputable brokers: When assessing an IPO, it’s important to consider the stockbroker handling the offering. The bigger and more reputable the stockbroker, the more reliable the IPO is likely to be, as they typically only underwrite issues they believe in. However, remember that even if an IPO is supported by a well-known broker, it may not always mean that the IPO will perform well.
Understand the lock-in period: This is an often over-looked but valuable tip for IPO investors. As per SEBI guidelines, every public offering comes with a 6 month lock-in period which is also known as lock-up period, starting from the date the shares are listed on the stock exchanges. During this time – early investors such as promoters, institutional investors and employees are prohibited from selling their shares. Typically, share prices may dip once the lock-in periods ends, as these early investors are allowed to share their holdings. By being aware of when the lock-in period expires, you can make informed decisions about when to invest in the stock. If you wait, you can analyze the stocks profitability and prevent falling victim to early volatility.
Develop an exit strategy: As an investor, it’s crucial to have a clear exit strategy in place before investing in an IPO. For example, if you are a short-term investor, you might decide to sell once the lock-in period ends. Alternatively, if you are an ultra-short-term investor, you may opt to exit within the first few days after the stock begins trading.
CONCLUSION:
Currently, the Indian stock market is flooded with IPOs across various sectors, including food delivery, infrastructure, energy, super markets, payment apps and more. Many of these IPOs are oversubscribed, meaning not everyone will receive an allotment. In such times, it’s important to have a well-defined understanding of your financial situation and investment strategy. It’s important not to blindly follow the crowd but instead develop your own approach when investing in IPOs.