An Initial Public Offer (IPO) is the first step taken by a corporation to enter the Stock market. It is the introduction of the corporation to the investor in the stock market.
The year 2021 witnessed many IPOs from varied fields ranging from the online payment merchant Paytm to an online cosmetics brand store Nykaa to Anand Rathi Wealth Services that provides investment advice relating to mutual funds, broking, insurance, etc. This article is not for those who Just See the GMP and apply in IPOs for Listing Gains only. It is about Investing in IPOs for a longer period.
All these IPOs received a Mixed response from the market, particularly from the new investors. However, an investor must understand the fact that just like the Stock market, IPOs also have a huge risk factor associated with them irrespective of the name that the corporation holds in the eyes of the people.
So, here are some points to keep in mind before applying for an IPO :-
1. Investment Horizon
The first thing to keep in mind is that the investor must know about the aim of the investment. Do you wish to gain short-term profits or aim to build Multibagger returns in the long run? Is the investment for any specific purpose or a General investment? Does the sector You wish to invest in make your portfolio balanced or lopsided? Once answered, the investor gains clarity about how to Proceed further.
2. Risk Factors and Appetite
The next thing is to analyze the risk factors associated with the IPO and how much risk he can bear the risk. To analyze the risk, one can go through the Draft Red Herring Prospectus (DRHP) that is available on the listed exchange’s website. This would help him to gain insights regarding the purpose of the IPO; the fundamentals of the corporation; the utilization of the proceeds from the IPO; and various other things like the debt-equity ratio. Knowing about these things would help the investor form an image of the corporation and help in the investment decision.
3. Check the Background of the Promoters
While going through the DRHP, one should also check the past performance by assessing the P&L Account and Balance Sheet of the corporation to know about the profits, debts, and capital structure. In addition to this, one must also have a look at the profile of the promoters and their holdings in the corporation. This can also tell you about their holdings after the listing in the stock exchange. There are cases when an IPO is introduced just to reduce the holdings of the promoters as they want to exit the company. An investor should beware of such situations. Also, check Upcoming IPO details before applying for an IPO check the past records and decide.
4. Strengths and Strategy of the Corporation
One should also look out for the strengths and future strategies of the company mentioned in the DRHP. What are the Objectives of the IPO? Whether the IPO is Complete Offer-for-Sale (OFS)? A brief walkthrough of the strengths and current strategies helps the investor to get an idea of the future expected performance of the corporation and whether it is worthy of his time and money or not.
5. Comparison with Peers
Lastly, an investor is advised to compare the corporation with its competitors in the market. By comparing, one can predict the survival of the corporate after being listed among the competitors. If the corporation has a good market share with good financials and a low share price, then it can be a good opportunity to make some money. But if in case the market share isn’t significant enough or either the share price is higher than expected, then one should restrain from investing as it can lead to losses.
Things to Know before Applying for an IPO
- Investment Horizon
- Risk Factors and Appetite
- Check the Background of the Voters
- Strength, Vision & Strategy of the Company
- Comparison with Peers
In the end, we would advise the investors to rely on their respective research and consider these 5 Things to Know before Applying for an IPO if they haven’t. If you believe that the company has a Great Vision, Management has the Potential to achieve them, and that the Company may fetch good profits, only then they should invest in it and not on based on the temporary rise or fall in the Stock Market.
As we know, the Stock Market is all about the timing of your entry and exit, sometimes the IPOs may be introduced at the right time but sometimes it’s better to Wait for a while. One should time their investment and make an informed decision accordingly.