Every year, many privately held firms become publicly listed companies by floating shares for the first time. This process of ‘going public’ and raising capital by issuing new shares is known as an IPO. The IPO full form is Initial Public Offering. It is evident from the full form of IPO that shares of these firms were never traded on stock exchanges before their IPO.
Investing in an IPO is not as difficult as you think. There have been interesting cases with respect to IPOs. Even IPOs of firms with strong fundamentals and brand name have failed in the past. You need to be cognizant of certain aspects before taking the plunge.
Things to keep in mind when you invest in an IPO
Company information or research
Procuring information on a company yet to be listed on a stock exchange is a daunting task. However, you can visit the website of the firm launching an IPO. The financial statements on its website will give you a fair idea about the company’s financial condition. Also, you can check their Red Herring prospectus which is hosted on the website of SEBI. Strong financials with adequate debt servicing capability gives a favorable picture of the Company’s finances.
The other important factor to check is the firm’s corporate governance policies. Any lapse in this regard gives an unfavorable picture of the firm. A company with a good corporate governance structure can be a suitable IPO for investing.
Company’s Draft Red Herring prospectus
A firm’s prospectus is a legal document containing complete details on the securities that are offered for sale to the public. In short, a prospectus gives full information on the firm’s upcoming IPO.
It also includes information on the firm’s vision, objectives, business, promoters, the board of directors, financial performance, public disclosures, and CSR (Corporate Social Responsibility).
You can get an idea about the company’s future growth prospects and expansion plans by thoroughly analyzing the prospectus. This will help you make a calculated decision on whether or not to invest in the firm’s IPO.
Current share valuation
You can determine the fair value of the share price in an IPO by using the DCF valuation technique. You can also use the price to book or price to earnings ratios to get an idea of the company’s financial status. A comparative analysis with the stock prices of competitors will also be useful.
Depending on the fair share price and growth forecast figures, you may or may not invest in the IPO.
Firms taking the IPO route spend lots of money on advertising and marketing. They can make exaggerated claims to make their IPO more attractive to the public.
However, the onus of determining which part of the advertised claims is true and which part is overstated is on the investor. Accordingly, you can decide whether or not to go ahead with your investment decision.
Patience pays off well
It is detrimental for investors to give in to the current buzz and make a rushed investment. As an investor, such moves will hurt your gains. In fact, you may incur losses if the IPO fails.
Demat and trading accounts
You need a Demat account to invest in an IPO. A Demat account holds your physical securities in digital form. But, if you have to trade the new shares in the secondary markets, you will need a trading account.
You can open Demat and trading accounts with any registered broker or Depository Participant (DPs). Many DPs allow you to open Demat and trading accounts online at zero cost.
Many IPOs are slated to hit the Indian market in 2021. IRFC, Indigo Paints, and HFFC were 3 IPOs that were successfully launched in January 2021. With many more IPOs to be launched in the coming months, keeping in mind the above-mentioned points will help you choose the right IPO for investment.