Despite numerous companies attempting to make big names in this digital age, many of them end up with a fate that doesn’t leave any memory behind, so we must learn to invest in IPO. Gains can occur right away or after a long period. Some people may become discouraged if their first IPO price goes red on the very first day or if it takes a downward path over time. The lesson you can draw from these situations is that there is no sure-fire way to make money on the stock market. The market is way too volatile!
Finding a good IPO is not easy, but it is not impossible. There are certain characteristics of a good IPO investment. You are more likely to get lucky if you get most of it right in the IPO you are planning to invest in.
What Makes A Good IPO?
The equity markets are flooded with IPOs, so investors are spoilt for choice. It can be difficult to determine which IPO is the best to buy. You can use the following criteria to determine whether an IPO is worth investing in:
1. Examine the company’s business model, manager credentials, and history
Red herring prospectuses are a good starting point when evaluating the best IPO to buy. A company going public issues this document.
There is enough information here to evaluate the company. Websites, annual reports, and media reports are other sources.
Don’t invest in companies unless you feel they have a good business model, good financial health, strong revenue potential, and qualified management. Consider factors such as the company’s industry position and its unique attributes that distinguish it from competitors.
2. Potential for growth
Strong revenue growth in the past is not a guarantee for future success. IPOs that have the greatest potential for future growth are the best ones to invest in since stock prices track future growth.
You should start by evaluating the industry the company is in before undertaking an IPO investment analysis. Afterward, predict the company’s growth in market share in the upcoming years.
A few factors to consider are how much the company invests in technology, how innovative its culture is, what it is doing to expand its market, and how it is leveraging its strengths.
You might invest in IPO if you think the company is doing well on all these parameters.
3. Intentions of the promoter
While a company is growing and profitable, nobody wants to leave. Before investing in an IPO, check how much interest the promoter group is diluting. After an IPO, the law requires promoters to hold at least 20% of the shares. The promoter of successful companies usually holds a greater percentage of the company.
It may mean the promoter group no longer has faith in the company if it is diluting its stake significantly. The company might also not be keen on running it for long, and may not give it adequate attention. It might also be involved in some foul play.
A quick way to tell what the management’s intentions are is to look at what they are taking from the company. It is highly suspicious to invest in a company that pays its management large remunerations and dividends. This is especially true if the IPO also significantly dilutes the management’s stake. It is best to stay away from such a company.
4. The use of proceeds
The red herring prospectus itself reveals how the IPO money will be used. IPOs that are best for growth involve investments in new technology, entering new markets, setting up new production facilities, or acquiring other companies.
As a result, the company can increase its revenue and profits, raising its stock price and increasing dividends. Verify that the company has a strong growth plan in place and that the proceeds will be used appropriately to meet that plan.
It may not be a good idea to hold an IPO to repay old debts, settling old claims, or investing in working capital.
You should not invest in IPO just because the company is famous. Best-performing IPOs are distinguished from others by their brand name. Numerous companies can overvalue their shares and offer oversubscribed IPOs.
Through competitor analysis, it is possible to estimate the fair market value of a stock. There are two commonly used multiples for this: Price-to-Sales and Price-to-Earnings.
Divide a company’s share price by its share price and net income per share to calculate these ratios. Both of these figures appear in the company’s income statement. Overpriced stocks may have these ratios higher than those of their competitors. A company such as this should not go public.
The shares of a company may be valued higher at times if its products are better than those of its competitors. Analyzing the company’s history and prospects will reveal whether this is true.
When To Invest In IPO?
Retail investors are very interested in initial public offerings (IPOs). However, that doesn’t mean you should bid for every IPO that comes up. Before investing in one, you need to consider many factors. So here are a few tips on when to buy (or not to buy) IPOs.
1. Take a look at the projected figures
There is a lot of jargon in the prospectus on the Securities and Exchange Board of India’s (SEBI) website. However, you shouldn’t be put off by that. This document contains a lot of useful information.
Check if the company is investing in expanding operations and entering new markets. Examine the document’s projected financial figures. There are many times when companies overpromise and underdeliver.
2. Reasons for going public
Consider the initial shareholders and founders of the business. Examine whether the IPO is a reason for the initial investors to cash out and exit the company. The fact that the original investors have little faith in the company’s growth is another red flag.
3. Beware of record-high markets
Investors are highly optimistic when the market is performing well. Growing is everyone’s dream. Every new IPO sounds like it will be the next big thing. That’s not the case, unfortunately. In the late 1990s, the dot-com bubble was a prime example of such optimism.
Keep a close eye on the market when it is performing well. Only invest in companies with strong fundamentals and high growth potential.
4. Funding utilization
When a company cannot repay its loans without issuing stock, it means something is wrong with its internal operations. Don’t give such companies the respect they deserve.
5. Performance by sector
When investing in an IPO, you shouldn’t look at the stock in isolation. Getting a better understanding of a sector’s performance is always a good idea.
Take, for example, a company that is in the IT industry. It is advisable to analyze the performance of similar stocks. What is the stock market doing? What are their prospects and the opportunities and threats?
Answering these questions can help you gain a better understanding of the competition and future growth potential.
Tips and Strategies to Invest in IPO
There are certain strategies involved in making money from IPOs. You can make meaningful gains in the long run if you get them right. The following are some IPO investment strategies you should follow:
1. Check the Company’s Performance
Before investing in an IPO, check the company’s long-term performance. Watch out if the company’s revenues increase suddenly before the IPO. In all likelihood, if the company has grown decently over the years, then it is a good company.
If, however, the company has been reporting poor numbers over the years, it’s better to pass on its IPO.
2. Learn how your money will be used
Finding out how the company will use your money is a sound IPO strategy. Make sure you understand the company’s plan for using capital raised in the prospectus.
Investigate the company’s plan of action, which could include developing new products, expanding, or improving infrastructure. Go ahead, and invest if the prospects are promising.
3. Verify the background of the promoters
Checking the background of the promoters of the company is an essential part of IPO buying. Check their experience and track record to see if they are reputable.
Look into the company’s payment default history, as well. If you plan to IPO a company, be sure the firm has a clean record and strong corporate governance.
4. Zero-in on a Strong Broker
An established broker is a key to participating in a lucrative IPO. The reason for this is that it can be difficult to participate in an IPO with good prospects.
A reliable and sound broker can make a difference, however. Your allocation will be decent thanks to their connections.
5. Fill out the application form carefully
Another important way to invest in IPO is through this form of financing. Fill out every detail on an application form. Completed forms are rejected.
Don’t forget to fill out ECS refund as missing it will result in a non-refund in your bank account.
The Bottom line
If you know what to look for, picking the best IPOs is not so difficult. Each time an IPO comes up, you can refer to these IPO investment tips.