Initial Public Offerings (IPOs) is the first selling of stocks issued by an organisation to the public. The organisation is considered as private before taking the IPO route with a comparatively less number of shareholders. Investors such as the founders, their friends and families and professional investors such as angel investors and venture capitalists make up the primary investors of a private organisation.
Until an organisation’s stocks are offered to the public for sale, the public is unable to invest in the organisation. This is the main reason why an IPO means “going public.” An investor can potentially request the owners of a private organisation about funding in the business, but the organisation is not obligated to trade. But in the case of IPO, the organisation has to sell a certain portion of their shares to the public on a stock exchange.
Perks of IPO Investment
IPOs are popular in India and many people attempt to generate funds by investing in IPOs. However, the expectations of high profits with IPO investment isn’t possible always and many investors have seen their prophecies going wrong with staggering losses. IPO is not a speedy way to earn a huge profit, and investing in the financial markets never promises sure shot results. Keeping this in mind, IPO is still a reliable option for long-term gain instead of a prompt way to earn huge gains.
Selecting an IPO investment with good returns is uncertain but not impossible. Though it is important to identify whether an IPO will be good for you with a bit of planning and right judgment.
Let’s take a look at some of the IPO tips for investing in an organisation at the right time.
Thorough Research on an Organisation
Getting information on an organisation through a third party website’s isn’t a smart idea. Rather, review the data on qualified institutional buyer’s (QIB) concerning the organisation, and check the annual growth of the organisation for the past few years against the maturity of that particular industry. It will help you get a fair insight into the organisation’s management and performance. Moreover, look out for impending acquisitions and mergers that could push up a stock’s valuation.
Review the Company Prospectus
Certain organisations over-promise and under-deliver, and such mistakes are made by those who are striving for success in the marketplace. Therefore, it is essential to read the prospectus of an organisation before investing in it because the prospectus gives an in-depth knowledge about the organisation’s opportunities and risks, along with the intended applications of the funds raised by the IPO. For instance, if the funds are being used to purchase the ownership from founders or private investors or to repay loans, then avoid the investment. Money that is going toward research, expanding, or marketing into new markets is a better investment option.
Pick a Good Broker
Commonly, good brokers can guide an investor to profitable IPO stocks, and it is through such brokers that most of the quality organisations enter the stock market. Thus, exercise more discretion if you’re picking smaller brokerage firms or stock brokers because they may manipulate the situation according to thier needs. However, one good thing about smaller brokers or agents is that their smaller client base makes it easier for an investor to acquire pre-IPO shares.
Analyse the Potential and Check the Promoters
Researching the industry in which the organisation belongs to will help you ascertain how successful the organisation is and also the other players in that industry. By identifying the current and previous market trends and potentialities of a particular industry, you may get an insight into the organisation’s history and be more alert about investing in an IPO. Moreover, never make the mistake of investing without investigating the people associated with the organisation. If the organisation’s promoters are stable, there is a higher chance of excellent performance. You can also analyse the performance of other organisations with the same promoters.
Conditions of the IPO scheme
If the management is experienced, the size of the market looks profitable, and the compensations paid to stock brokers are reasonable, then investing in an organisation may appear as a great opportunity. However, if the IPO scheme is structured in such a way that performance shares are automatically issued to the organisation in the future, then it might dilute your shareholding. Remember, each stock you purchase represents your share of ownership in that organisation, and the more stocks issued, the less advantage each one serves. Thus, investigating the details while determining whether or not to fund in the organisation will be helpful.
If you have decided to invest in an IPO, ensure you use the above-given tips, and always consider your investment as a long-term prospect. Similar to other investment options, IPOs have their own set of risks, but with trustworthy practices, you can make a profitable IPO investment.