Initial Public Offering (IPO), the first time when a privately-owned company decides to sell its shares to the general public. It is to raise capital by issuing equity or debt financial instrument under the IPO process. Being publically traded opened many financial doors for a company. With the raised capital, the company or corporate can do debt repayment, expansion, finance other business activities, and pave way for merger and acquisitions.
From the investors’ point of view, investing in an IPO has its own set of benefits. It is an opportunity for them to unearth quality stocks that are yet to be listed, at a much-discounted price. However, it is not as easy as it seems. Investors who have the foresight to get in and out made it looks easy but it is not. Nowadays, IPO investing pick up the trend once again. But, the focus has shifted towards early gains rather than holding to carefully scrutinize its long-term prospects.
As a result, many investors are making mistakes while investing in IPOs. Thereby, we’ve come up with some important things that you should know or consider before investing in any IPO stocks.
What You Should Know Before Investing in an IPO?
Below we’ve mentioned the 5 key things you should know before investing in an IPO stock:
Read the Red-Herring Prospectus
Thanks to the Securities & Exchange Board of India (SEBI) for mandating every company to file a draft of the red-herring prospectus with them at the time of applying for IPO. Any information you want will be available within the prospectus. So, as part of your IPO research, don’t forget to read the red-herring prospectus. It will give you a lot of historical information about the company. So, make sure you read it carefully.
Look out for current distribution. If the majority of shares are held by institutional investors and banks then it would be a good sign. You should also check out about the management.
Check for Promoters and Brokers
Any key thing to look at is the list of promoters who are promoting a particular IPO. The promoters could either be a company or an individual. If you spotted some recognized names within the list then it would definitely be good and certainly, add credibility.
IPOs have brokers and underwriters which help the company with the IPO process. As you are planning to invest in an IPO, then you must know who is bringing it on the table.
It is not always about what happened in the past or how the company performed in the last 10 or 20 years. You must be doing research from the future point of view as well. After all, you are investing in future financial goals. So, if the investment is for the future then you should be able to review the prospects.
Consider the industry and how the IPO fits into the picture. What future do you see of the company in the next 10 years?
When you want to invest in an IPO, you would want to grow over time.
Whenever a company goes public, the underwriters make company officials and employees sign an agreement, prohibiting the employees from selling any shares for a specific period. This period is often called the lock-up period. Within this period the employees and officials are prohibited from selling shares. But, when the lock-up period ends, all the insiders are prohibited to sell their stocks which put severe downward pressure on the stock price. So, while you are at it, find out about the lock-up period and then consider waiting until it passes.
Avoid the Hype
You must understand that the underwriters are a salesman. The whole IPO process is to create hype and receive as much attention possible. After all, the IPO is something happen once for each company. Some IPOs meet the expectation and continue to grow in the future but most IPOs end up selling below their offering prices within a year. So, do not make that investment because it’s an IPO. Think of it as an investment for your growth.
Hope, this guide will help you in figuring out the right IPO to invest in. If you have any query or would like to contribute something here don’t forget to mention in the comment section below.