Akash Jha
Introduction:
Investing in Initial Public Offerings (IPOs) of companies has become popular. Whether you are a seasoned investor or a novice, you can invest in promising IPOs and receive substantial returns within a few days. Recent IPOs, such as Cyient DLM, Utkarsh Small Finance Bank, Mankind Pharma, and ideaForge Technologies, have provided investors with outstanding returns.
However, not every IPO has the potential to generate comparable returns. While some securities trade at a substantial premium on secondary markets, others fail catastrophically after listing, resulting in substantial losses. So, how can one determine if an IPO is beneficial or bad?
Well, no one can accurately predict the returns that an IPO will generate, but the following advice can help you make informed investment decisions:
How to Find Right IPO For Investment
Read the DRHP carefully
The Securities and Exchange Board of India (SEBI) requires a firm to submit a Draught Red Herring Prospectus (DRHP) before it can begin the initial public offering process. The issuing business provides nearly all relevant information for an initial public offering (IPO) in this document, including the issue size, number of equity shares offered, probable price band, face value of shares, etc.
You may learn all you need to know about an initial public offering (IPO) by reading the DRHP carefully. Financials for the last three years, the company’s strengths, hazards, and other information that might assist you determine whether or not to invest in an IPO can be found as well.
Check for the reasons behind an IPO
Before putting money into an IPO, you should always investigate the motivations behind it. In doing so, you will gain insight into the intended use of an IPO’s profits by the issuing business.
An initial public offering (IPO) is one option for a corporation looking to raise money for growth, consolidation through merger or acquisition, debt reduction, or general operating expenses. An IPO that will be used to pay off debts and fund growth is a good indication to investors that the money will be put to good use.
Understand the business model of the issuing company
Understanding a company’s business model is essential before purchasing stock in its first public offering (IPO). Also, be sure you have a firm grasp on what it is that it sells to its consumers. The next step is to look for openings in the market now that you know this information. This will allow you to evaluate the company’s potential profitability and determine if it is worth investing in.
Companies with well-defined strategies and solid financial backing have a much better chance of lasting the long haul. You can safely ignore an IPO from a firm whose business strategy you find confusing or ambiguous.
Look at the valuation of the IPO
An initial public offering’s valuation is determined by the issuing business, with advice from an investment bank or underwriter. Investors consider a company’s financials, present assets, liabilities, historical performance, and potential profitability when deciding whether or not to invest in an initial public offering (IPO).
An initial public offering (IPO) is worth investing in if its price looks reasonable. But if an IPO’s price tag looks too high, it’s best to pass on buying shares. After listing, the value of such IPOs typically decreases.
Don’t go for the hype
You should never invest in an IPO because you were caught up in the pre-listing enthusiasm. Remember that a well-known brand is no guarantee of financial success. The DRHP is the best place to learn about the basics of a firm and its operations.
Long-term investors in an IPO also need to exercise extreme caution. Overhyped initial public offerings (IPOs) can produce substantial returns on listing day but often lose their lustre within a year or two.
Also Read : India Inc Prepares for the IPO Boom
The bottom line
Investing in initial public offerings (IPOs) can be a great way to get rich quickly. The fundamentals of the issuing firm, rather than market hype, should be your primary consideration when choosing an IPO. It’s preferable to take your time reading the DRHP’s tiny print and analysing your options before making any investing decisions.
