The investor fraternity is in a happy place because it is raining IPOs. Several popular brands are getting listed in quick succession. There are umpteen opportunities for investors to invest their money in diverse businesses and grow it rapidly. But is every IPO a good buy? Do all of them perform well in the long run? How do you decide which ones are the right pick for your investment? This article will help you understand all of it – the basics of an IPO and the tips that you should follow to filter the best IPOs.
What is an IPO?
An IPO (Initial Public Offering) is how a private entity goes public. It is the first offering of a company’s shares for investment to the general public. Companies launch their IPO to raise funds for their growth. After its IPO is launched, a company gets listed on the stock exchanges such as BSE, NSE, etc. Its stock is then available for buy and sell in the open market. The issuing company sells its equity through an IPO in a minimum defined lot size of shares. And if you want to invest in that IPO, you have to apply in multiples of that defined lot size. For instance, let’s assume company ‘A’ is launching its IPO. The price band is set at Rs. 90 -100 per share, and the lot size is 30. It means if you want to invest in the company ‘A’ IPO, you have to buy a minimum of 30 shares or multiples of 30 for applying in that IPO.
Some IPOs are launched as the company owners want to sell their stake in the company and offer it for sale, while some IPOs are launched to raise fresh equity in the company. Investment banks facilitate launching an IPO by helping the issuing company calculate its valuation, deciding the share’s price band, IPO launch date, the quantum of shares that can issue an issue, etc.
Strategies for a successful IPO Investment
An IPO marks the debut of the company in the stock market. Hence, it is an exciting platform for investors. And more often than not, the price to procure shares through an IPO turns out to be lesser than the listed price. Thus, IPOs offer a great opportunity to investors to earn from listing gains. However, every IPO may not result in a successful investment. You can filter out the winning IPOs by following the below-listed strategies that will help you to scrutinize an IPO thoroughly,
Research About the Issuing Company
It is the most crucial step that you must thoroughly follow before any investment decision. Study everything there is to know about the issuing company – its business line and sector, its balance sheets and other reports, how and where it will use the funds raised through the IPO, etc. The company prospectus and web pages are credible sources of information, but they can be biased since it is by the company itself. For an unbiased version, scout through previous press releases, competition reports, sectoral reports, news in and around that industry, etc. Financial expert opinions may also give you an interesting perspective on the financial health of the company. It is also wise not to get tricked by big names in an IPO. Be driven with data and factsheets when you plan an IPO investment and not just market sentiment.
Research about the Ongoing Market Trends
Market trends and the overall market sentiment have a lot of impact on how an IPO will perform. Ongoing market trends will give you insights into whether the IPO will be a win or a dud. Hence, try to invest in IPOs when the markets are greener, especially the IPO category. Grey market premium (GMP) is another indicator of how well the IPO might perform after listing. The GMP is the price at which the shares are traded in the grey market ahead of the listing day. It is a volatile price and depends on speculation. A high GMP indicates that the IPO may perform well, while a low GMP signals a weak listing day for that IPO.
Track the Applications for the IPO
Usually, any IPO has a 2-4 days window for application. Keep track of the volume of the applications that are subscribing to that IPO daily. It will give you a reasonable idea of how successful that IPO will turn out. The subscription of an IPO can be over or under based on its popularity among investors. An under-subscribed IPO means your subscription will be allotted shares, while in an oversubscribed IPO, the chances of share allotment to you depend on probability.
Be Clear of your Intentions for the IPO Investment
Are you in the IPO for the long haul or momentarily till the listing? If you are looking at an IPO for long-term investment, you should go for companies with a promising future. Robust company fundamentals, attractive balance sheets, established brand presence and many such factors are identifiers of successful companies. Suppose your IPO investment intention is to only benefit from superficial listing gains. In that case, GMP, market trends, and the price charts should immediately consider the listing with the company fundamentals and other aspects.
Prerequisite for Investing in an IPO
You need a Demat Account to invest in an IPO. If you don’t have a Demat Account, consider opening one with a full-service registered broker like ICICI Direct. It comes with a host of additional value-based benefits like consultancy, investment recommendations, research, investment assistance, etc. These quality services and accurate guidance prove to be very useful for any investment beginner. Can regularly update you about all the ongoing and upcoming IPOs on the webpage of ICICI Direct.
As lucrative as IPOs may seem, you should know that not every IPO is profitable. So stay away from the temptation of investing in every IPO that gets launched. Research well, study the markets, understand your investment objective, assess your risk appetite, and accordingly invest in the most promising IPOs.
Disclaimer – ICICI Securities Ltd. ( I-Sec). The registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No: 022 – 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990.I-Sec is a SEBI registered with Investment Advisor(IA) vide SEBI Registration Number INA000000094. Please note, IPO, Research and Investment Advisory related services are not Exchange-traded products, and I-Sec is acting as a distributor to solicit these products. All disputes concerning the distribution activity would not have access to the Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in the securities market are subject to market risks; read all the related documents carefully before investing.