When selecting lucrative investment options, entry-level investors must research IPOs just like they do listed companies. After all, IPOs have gained massive popularity in India. In the first half of 2021, a whopping Rs 27,417 crore* were raised by Indian companies through IPOs, which is the highest in over ten years. No wonder 2021 was a landmark year for investing in IPOs entering the markets.
WHAT ARE IPOs?
IPO stands for Initial Public Offering. In its simplest form, IPO refers to a company going to the public to raise money to expand its scale. A person who invests in the company’s IPO is known as a part-owner of the company even if they invested just Rs 10.
TO INVEST OR NOT TO INVEST?
IPOs are riskier than already listed stocks as they involve a fair share of risk, so investors must make well-informed decisions. After all, you don’t want to invest in an IPO just because of its hype. Or put your money in an unknown company or one that lacks a strong business model and growth potential.
So, how do you decide whether to invest in a company’s IPO or not? And how do you make the right purchase decision?
Let’s look at some of the factors to consider.
PROFITABILITY
A company that is going public should have a solid business model and growth plan. One must invest in a company that will be profitable in the long term, irrespective of whether there is hype around its name or not. Of course, investing in a new company always comes with risks, but that does not mean known names will always be profitable.
As an investor, it is up to you to exercise due diligence before investing in the company. Do your homework by researching the company’s founder/s and the kind of innovation the company is bringing into the market. Ensure that the company has the potential to make money and only then invest in their IPO.
PRICING
Another factor investors need to consider is the pricing of the IPO. A company may overprice its shares to raise the maximum capital it can. But where does that leave the investor?
So before investing in a company’s IPO, watch out for whether the IPO is overpriced or not by comparing its price with peers. Steer clear of overpriced IPOs because if you invest in an overpriced IPO, your dreams of selling them at a profit will only remain a dream.
KNOWLEDGE
Often investors put their money in an IPO without knowing what they are getting themselves in. So, ensure enough clarity about the company in which you are planning to invest. What do they do? Are they offering a service or product? Gather sufficient information and only then put your money in their IPO.
And while you are researching, find out why the company is going public – whether they have genuine plans to grow or is facing a cash crunch due to hefty loans, etc.
GRAY MARKET EVALUATION
Before investing in an IPO, you must check its Gray Market Premium (GMP). GMP basically refers to the price at which the shares of the IPO are sold in the gray market, even before they hit the stock exchange. Since these transactions do not happen via the stock exchange, and happen unofficially, it is crucial to remember that GMP doesn’t always mean that the IPO will be successful as it may be based on hype.
CLOSING THOUGHTS
IPOs can be a good solid investment when you invest in the right company at the right price. However, it is tough to find the best performer and almost impossible to predict the winner in the long run. Hence, as an investor, you must do your research before jumping into the IPO boat. And always remember that IPOs are not the only way to invest in the stock market. You can always find hundreds of other profitable companies already listed with a strong track record and dividend history.
Source: Economic Times
