ARTICLES

It’s IPOs (Initial public offering) galore! Some of them turned out to be blockbusters, while others ended deep in the red. There is a need to assess multiple factors before one embarks on the journey to invest in IPOs. 

Why should one invest in IPOs?

IPO is the process where a privately held company is raising money for expansion or growth from the public by the issuance of shares which translates to ownership in the company. There are many benefits of investing in an IPO:

Enter early on and gain ownership in a company with a high potential to grow in the future.

Many IPOs gain substantially on listing in the secondary market, this can translate to a significant upside in a short term.

Some of the IPO investments have created substantial wealth to investors over the long haul, it can be a method to gain big returns in the long run.

If you choose the right company, with good prospects, then in all likelihood IPO price will be the lowest price at which you will invest in 
India is an emerging economy that is growing at a very fast pace, it is becoming one of the hotspots for IPOs and global investors. 

Risks in an IPO

Although IPOs provide a good chance of short-term success and long-term wealth creation, it is not devoid of risks, there are instances when the stock has seen a sharp fall soon after listing. Look out for red flags like:

Unreasonable valuations

If the price at which the IPO is being offered is not backed by strong fundamentals, there is a high chance that the IPO will see a quick downfall after being listed.

Promotor offloading

Promoters may choose to sell off their shares during the IPO, this could often be due to the possibility of no substantial upside in the future.

Market timing

Many of the IPOs are often floated when the going is good in the markets, this could be an attempt to capture the market momentum and push the prices even further. At a later stage, the stock is likely to come back to its fair valuation with a sharp correction.

Top 5 things to consider while you invest in IPO in India

• Appraise the fundamentals of the company, ensure that the price range is fair. The listing price depends on the supply and the demand called price discovery. 

• Look for the x-factor which will warrant continued growth of the company.

• Research about the company’s management to ensure that they will continue to work in the best interest of stockholders.

• Read about the company’s competitive positioning, market share, expansion plans, revenue mix.

• Ascertain the risk factors to understand how policy changes and the macro event could hamper the future growth of the company.

The frenzy around IPOs at current levels of the market is quite apparent. The onus is on the investor to ascertain the risks and make an informed decision to invest in the IPO or let it pass.