When investing in listed equities, it is usually done in one of three ways. You can trade, invest in FPO, or invest money through an IPO. The latter, IPOs, stands for Initial Public Offering. IPOs are a medium through which a company gets listed on the stock market. This changes its legal status to a public company that the market can openly trade.
Before IPOs are announced, the company has to file with SEBI. The company files the draft red herring prospectus that contains the details of the company, its future plans, its vision, financial statements, plans on how the amount raised will be used and vital information. These details are what help investors, both retail and HNIs, decide on whether to invest in upcoming IPOs or not. Here are five things that every finance geek should know about IPOs:
- Read the prospectus and conduct research:
Investments of any kind, especially IPOs, require extensive research. This research should help you learn about the business and the sector and make a better judgment about how the investment will benefit you.
- Understand risks: Equity investments contain risks:
They are ruled by market sentiments. To take on that risk, you need to evaluate your risk capacity and risk appetite. Risk appetite is what you can absorb; capacity is what you can actually take in a single day/period.
If you can tolerate the risk of an upcoming IPO, feel free to invest in it. Otherwise, consider it once and consider other options.
- Do a basic search on management and promoters:
At times, promoters and management may exit the company during an IPO. This is a potential red flag that should make you suspicious. While doing research on promoters and management, check if there are any pending legal or other suits against them. This will help you stay away from potential risks that can hamper your capital.
- Review financials and do an industry comparison:
Read the financial statements of the organization. Understand the fundamentals of their business, how strong their unit economics are, and whether there is some discrepancy in the books of accounts.
Compare their trajectory and margins to those of competitors in the same industry. Understand the reason for the differences in their growth trajectories and returns.
- Speak to an expert if needed:
Learn from an expert about the queries you have. Ask them for their guidance. Learn how they evaluate investment opportunities, evaluate valuations, conduct due diligence, and much more. This will make you a better investor.
Conclusion
Once you understand these aspects, investing in IPOs becomes clearer. Strategic analysis and insights can go a long way to make the most out of this opportunity.
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