IPO investment has attracted people for ages. It brings forward a privately owned company in the eyes of the public, making its shares available for sale for the first time. The company issuing IPO promotes itself with shimmers and clarion, pulling investors’ attention across the board. Every investor category follows a strategy to make the most of such opportunities.
While several factors drive investment strategy in the stock market, risk management is primary. The same is applicable in the IPO market. It is best to have a guide on picking an IPO issue for investment. To apply in upcoming IPOs, you can open a Demat account with a stockbroker. Below are a few add-ons for your investment strategy to make the best decision to select worthy IPOs.
- In-depth information about the Company
When you dig deep into the reports and data to have insights into the Company, you can get an idea of the Company’s strengths and possible business growth. As an investor, you should scrutinize company finances, goals, industry details, peer details and legal issues. A good IPO investment opportunity is where the Company has substantial growth potential. Also, evaluate the growth potential of the industry or the sector where the Company operates.
– Go through the business strength, i.e., the business verticals, performance, market share, management aspects, etc.
– Evaluate the Company’s growth potential as it leads to an appreciation in stock price over the longer term
– Estimate how the Company’s market share can grow in the future
- Consider an IPO with a strong underwriter
Investors can check the underwriters associated with the issue in their assessment. A different underwriter does not reflect whether an IPO will be successful, but depicts the possibility of quality since prominent investment banks(underwriters) consider quality associations for tie up.
Get an idea of where your funds will be used
Prefer investing in IPOs that will use the proceeds for activities such as, researching, marketing, and expansion. It may be alright to skip the IPO if the Company plans to use the money only to repay the debts. This is an essential indicator that investors should watch out for. On the contrary, funds used for the Company’s marketing, expansion, and research paints a promising canvas for investors.
Wait for the end of the Lock-in Period
This point comes into the picture when you have applied for IPO, got an allotment and wish to hold shares over the long term. If you are in double minds whether to hold it, or sell it in a short interval, you can consider waiting till the lock-in period.
A lock-in period means a legally binding period during which the company insiders cannot sell the shares. When this period finishes, insiders will make any move. If they decide to hold shares, it is seen as a positive sign as they believe in the Company’s strength and growth potential.
Check for promoter intentions
It is necessary to know if the promoters plan for the IPO to exit the Company. If yes, it will be a negative indicator. Investors need to check how much interest the promoter dilutes. Promoters of flourishing businesses generally hold their shares for the long term. If they dilute their stake significantly, it shows they do not have more faith in the company. It may also be possible that they are not keen to pay attention to this business for long term; nobody likes to exit their Company if it is profitable.
Going through the prospectus is inevitable.
A suitable way to evaluate an IPO is the Draft Red Herring Prospectus (DRHP) issued by the Company undergoing an IPO issue. DRHP is uploaded on the SEBI’s website and can be accessed by anyone. It provides the necessary information that investors need to make an investment decision. You can broadly grasp the Company’s business plans through the information provided in the DRHP. You can refer to the Company’s annual report and media reports for more insights.
Consider each of these pointers for your investment strategy for upcoming IPOs. Remember that a lot of frenzy around IPOs is because of the listing gain expectations, as it grows people’s wealth within 6 to 7 days. Stay watchful if you are applying in IPO solely for the listing gains, as several factors may impact the price on the listing day. A weak market due to adverse global cues or a major macroeconomic change can dilute the prospects for listing gains. The other way investors tread is by holding the IPO shares for the long term and benefiting from the share price appreciation. In either case, it is worth spending time on the research before making the IPO investment.
Investment in the securities market is subject to market risk; read all related documents carefully before investing.