An Initial Public Offering (IPO) of a company can be a good investment opportunity for long-term wealth creation. However, it is often considered to be riskier than investing in already listed companies. This is due to the relatively new nature of the company, limited data and uncertainty regarding the market perception of the public issue. That said, by simply implementing a few tips, you can navigate the risky environment of an upcoming IPO and ensure that you make a well-informed investment decision.
Tips for Investing in Upcoming IPOs
Here are 9 simple tips that you should follow before you decide to invest in a public issue using your trading account.
1. Understand the Company Well
As a potential investor, you need to get to know the company and its business well. The prospectus is an important document that every company going through an IPO publishes. The document contains extensive information related to the company’s history, business model, market position, products and services offered, financials and growth prospects. Reading through the prospectus thoroughly should give you insights into the potential rewards and risks associated with the public issue.
2. Analyse the Industry
Understanding the industry is just as important as getting to know the company. A company operating in an industry with extreme competition may not fare well in the future. On the other hand, a company in a new or growing industry is more likely to have better prospects for long-term success. Therefore, make sure to evaluate the industry, its future growth prospects and potential roadblocks.
3. Go Through the Financials
Financial performance is an important metric that can be a deciding factor on whether you should invest in an upcoming IPO or not. A good company should grow consistently over the years. Therefore, look out for increasing revenue and profits.
When analysing financial performance, remember to use financial indicators like P/E ratio, debt-to-equity ratio and Earnings Per Share (EPS), among others. Compare the ratios with the industry average and the company’s peers to get a better context.
4. Assess the Management Team
A competent and experienced management team is crucial for a company’s success. Therefore, evaluate the track record, experience and vision of the company’s management team. Start by checking how long the management team has been with the company and if they have any pending legal cases or not. Remember to also pay attention to the management’s decision-making ability. This should give you an idea of how they’re likely to navigate during a potential crisis.
5. Check the Offer Details
Exhaustively examining the public issue is another one of the most important things you should do before investing in an upcoming IPO. Try to understand the purpose of the IPO and what the company plans to do with the proceeds. Ideally, a company that raises funds through a public issue should invest in its business or use it for expanding it.
If the public issue consists of an Offer for Sale (OFS) component, check how much of a stake the selling shareholders are offloading. If the shareholders are offloading their entire stake or a majority of it, it may be indicative of trouble within the company.
6. Consider the Valuation
Not all upcoming IPOs may be valued reasonably. Some of them may be priced much higher than what their financials reflect. It is important to be wary of such overvalued IPOs since they often tend to go through a correction as soon as they’re listed. Restrict your investments to public issues that feature a price band backed by financial performance and future growth prospects.
7. Be Wary of the Hype
Every company that issues an IPO aggressively markets it through media advertisements to create hype and investor demand. It is important to not let the hype cloud your judgement. Always make investment decisions through proper research and analysis instead of relying on your emotions.
8. Invest With a Long-Term Perspective
Although some IPOs may provide short-term gains, it is crucial to note that investing in them for the long term is the ideal way to go. You should be mentally prepared for price fluctuations during the early days of trading and avoid making hasty decisions based on short-term price movements.
9. Place Bids at the Cut-Off Price
Only bids that are at or above the cut-off price would be eligible for share allotment. If your bid is below the cut-off price, it will be rejected. Therefore, when applying for an IPO through your trading account, make sure to select the ‘cut-off price’ option instead of manually entering bids. This simple tip can increase the chances of share allotment significantly.
If you are interested in investing in any of the upcoming IPOs, the first thing you need to do is open a demat and trading account. You can do this with any trusted stock trading app like the Bajaj Securities Online Trading App, which supports seamless and free-of-charge demat account opening and gives you many benefits like research calls for all levels of traders, 4x leverage with margin trade financing and more!