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How To Find A Good IPO: Things to know before buying

There are many people who want to learn to Find A Good IPO. The number of Indian companies raising money through IPOs for the first six months this year has been the highest in at least a decade, driven by an abundance of liquidity and investor frenzy. The vast majority of the funds raised through IPOs were used to offer exits to existing private equity and venture capital funds, as well as shareholders and promoters.

The coming months will be filled with a large number of IPOs in India, which is expected to make Calendar 2021 a record year for investing in IPOs. These IPO stocks have gained 400% in value since their listing in 2020, and some are trading above their issue prices. Investors who want to enter the market can benefit from IPO investing because of all these factors. Several big names are coming to the market before the end of the fiscal year, such as Paytm, Bajaj Energy, Nykaa, and LIC.

As IPOs flood equity markets, investors are spoilt for choice. Deciding which IPO to buy can be challenging. Here are some criteria to help you identify an IPO that is a good investment: If you are thinking of investing in an IPO, here are some points to keep in mind Find A Good IPO:

Understanding the business of the company

You should know what kind of business the company is involved in before investing in an IPO. Ideally, you should select companies that operate in a market that has high growth potential. The company will be able to generate consistent profits and increase its revenue with a high-growth business. If you’re not certain what a company’s business activities are, you may want to avoid investing in its IPO.

You should only invest in the company if you believe that it has a strong business model, financial health, revenue potential, and a competent management team. In addition, consider factors such as the company’s position in its industry and its unique attributes that make it stand out from the competition.

Possibilities for growth

Even a strong track record does not guarantee future revenue growth. An IPO with the strongest future growth potential is the best to invest in since stock prices track future growth.

Evaluate the growth potential of the industry in which the company operates before beginning your IPO investment analysis. Estimate how the market share of the company would grow over the next decade.

Here, you can use factors such as how much the company invests in technology, how it approaches innovation, how it expands its market, and how it takes advantage of its strengths.

It may be a good idea to invest in the IPO if the company passes all these tests.

Red Herring Prospectus is a must-read

Draft Red Herring Prospectuses, or DRHPs, are sent to Sebi by companies looking to raise capital from the public by selling shares of the company to investors. In addition, DRHP describes how the money will be used by the company, as well as possible risks for investors. Investors must complete the DRHP before investing in an IPO.

Assess the potential for growth by analyzing key financial parameters

By analyzing the vital financial information of the company, you can determine its financial health and assess its growth potential. You can determine a company’s leverage level, for example, by calculating its debt-equity ratio. When a company’s debt-equity ratio is high, it often indicates that the company is at risk. Similarly, you can look at the company’s earnings per share (EPS), cash flow, return on capital employed, and other key financial ratios before investing in it. If the company’s financials are not up to par and the valuation is low, you should not invest.

The company’s strengths and strategy

From the DRHP, investors can figure out the company’s key strengths. Additionally, it is important to find out the company’s position within its industry. One can gain insights into a company’s prospects of the business by reading more about its positioning and strategies.

Utilization of proceeds

The red herring prospectus explains the intended use of the IPO money. An IPO that will used for growth-related investments, such as entering new markets, setting up new production facilities, or acquiring another business, is the best.

These investments can result in higher stock prices and higher dividends if they increase the company’s revenue and profits. Ensure the company has a strong growth plan in place and that its intended use of proceeds matches this plan.

An IPO whose proceeds will use to repay old debts, settle old claims, or make investments related to working capital may not be the best.

Get to know the risk factors

You may not know that the company preparing to go public carries high risks from just looking at its financials or operations. It is important to read it’s Draft Red Herring Prospectus (DRHP) carefully to learn about such risks. In the DRHP, companies list all risks that may impact their businesses in the short and long run. Litigation, contingent liabilities, and other risks that may affect its everyday operations may include.

Pricing

You should not invest in an IPO just because the company is famous. It is not just the company’s brand name that distinguishes the best IPOs from the rest. Shares of popular companies can be overpriced and oversubscribed at initial public offerings. 

A competitor analysis can help you to estimate a stock’s fair value. Prices-to-sales and price-to-earnings are two of the most common multiples for determining this.

Divide the price of a company’s stock by its sales per share and its net income per share to calculate these ratios. These figures can found on the company’s income statement. The stock may overpriced if these ratios are higher than those of competitors. Such an IPO should be avoided.

Shares can priced higher sometimes when a company is better than its competitors. You’ll be able to tell if that’s the case by analyzing the company’s history and prospects.

Clarify your investment purpose

It may not be a bad idea to invest in an IPO for listing gains. But it should not be the only reason to do so. If a company fails to achieve listing gains, you should still select one with good fundamentals that can produce good returns in the future.

Some other important points to remember to Find A Good IPO

IPO investments should be in line with your financial goals and risk tolerance. Do not borrow money in the hopes of making quick gains. An IPO should also be invested in on its second or third day after opening. The response from the public will help you gauge its success. Chances of listing gain increase if the issue oversubscribed by several times. You may invest in fewer lots if the IPO highly oversubscribed because the chances of obtaining multiple lots are slim. Here we end our article on how Find A Good IPO. Hope you have learned something good.

Also Read: 10 Best Upcoming IPOs in India 2021

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