Five Tips for Investing in IPOs
Friday April 10, 2020,
4 min Read
When start-up companies or small companies start expanding their business or gain traction, they decide to go public in order to enhance their finances. Initial Public Offerings (IPOs) is a process through which a Private Company offers its shares to the public by way of new stock issuance.
The process is regulated by SEBI. Big companies like Ali Express, Snapchat, Uber, etc. have gone public giving its investors huge profits. IPOs can be extremely good investments, especially if you have trust in the company, even though they can be quite risky.
It is essential that you keep full information regarding IPOs before investing in them. For that, you can take assistance of websites such as IPO Corner which gives you all the insights regarding the happenings of the world in relation to IPOs which can be very knowledgeable for investors as well as other readers.
Here are 5 tips for investing in IPOs that will help you in taking the right decision:
- Do your own research: Although majority of the details of the company will be provided to you by the broker and will be published in the company’s prospectus but that does not mean you should not do your own research.
The prospectus, even though it is a key piece of information, is a biased one since it is provided by the company itself. Your aim must be to find out every possible detail about the company’s competitors, its accounting financials, the status of the company, etc.
You should rely on articles published by websites which offer insights into the IPO. The company’s past records, their aim, and the capability of its competitors are essential to judge how a company will do after the IPO. All such details will help you decide whether to invest in an IPO or not without blindly trusting the prospectus.
- Read the Prospectus carefully- A prospectus contains all information regarding the company, hence, your first step should be to read the prospectus carefully, no matter how cumbersome the task may be.
The prospectus is highly important since it contains all the necessary information such as the price range, price brands, details of the shares, etc. This will help you know about the risks that the company is willing to take, the future plans and opportunities that the company is going to delve into, etc.
Therefore, a detailed study of the prospectus is essential. You should exercise caution since many companies opt for publishing a prospectus which might be over-promising.
Hence you should take a good look at the accounts of the company which will be published in the prospectus itself and determine the intention of the company along with its capability to generate profits after the IPO.
- Select your broker cautiously- Underwriters are of key importance while investing in IPOs. Strong and reliable underwriters who charge a reasonable amount of brokerage will ensure that you invest in companies with optimum quality. Brokers who charge small brokerages have the tendency to offer you any shoddy company which might be a complete loss to you.
You need to exercise caution while selecting and trusting your broker or underwriter. Trusting a small broker may not always prove to be a failure but you should be careful and examine whether the scheme proposed by the broker is a doubtful one or not. A good broker will have decent connections to put forward the best proposal for you.
- Keep a check of how the IPO funds shall be used- The manner in which the company is going to spend its IPO funds is a key point that you must look in to order to avoid any mistake regarding the investment. If the company is planning to repay its loans or clear its dues then you should avoid spending your money on such a company.
You should only invest in a company which plans to expand its business through research and development or make diverse changes in its business with the help of strategies. Companies which aim at buying equity or meet the needs of the working capital are doubtful investment opportunities.
- Check the background of the promoters- It is imperative that you keep a check on the background of the promoters. The past records of the promoters offer insight into the position of the company as a whole. Even though the IPO of a company may look highly attractive, poor management of a company renders the investment a waste.
You should look for companies whose promoters have transparent management and corporate governance issues. Also, in cases where the IPO is for Offer for sale (OFS) where the promoter is seeking an opportunity to dilute his stake at the company, you should be careful to invest in such a company.