Keep These 4 Things In Mind While Investing In An IPO

  • Posted By : reliancesmartmoney.com
  • Monday Sep 03, 2018

The Initial Public Offering (IPO) market has picked up steam in the last couple of years. You may have come across a new IPO listing on the stock exchange every other week. IPOs have shown an impressive performance the past few years. Furthermore, emerging market conditions are likely to contribute to an accelerating IPO performance that we believe could only mean heartening news for investors.

The Basics of IPO

To understand how an IPO works, lets look at what it stands for. An IPO is a process by which a private company becomes a publicly traded company by listing its shares on the stock market to trade for the first time.

Illustration of Returns from IPO

Having said that, investing in an IPO is not easy. Investors must look into upcoming IPOs with an open mind and with caution. So here are some meaningful tips that can guide you on how to invest in IPOs.

Things To Keep In Mind Before Investing In IPOs

  1. Read the Prospectus Carefully
  2. Before investing in an IPO, it is a good idea to go through the prospectus of the company carefully. It lays out the company’s risks and opportunities. Moreover, it also provides information regarding the proposed uses for the funds raised by the IPO. The data on how the company plans to utilize the raised funds offers insight to prospective investors about the company.

  3. Conduct a Comprehensive Research on the Company
  4. It is of paramount importance to know the company well before you invest. A company’s past performance gives a clear picture of the company since its inception and how it will perform in the future. If the company’s performance reveals stable growth over the years, it is highly likely that it will perform well in the future also. To know more, you could go beyond the prospectus and research about the company, its performance, competitors, customers, overall industry health from various financial sites and reports etc.

  5. Focus on Fundamentally Sound Companies
  6. Though listing gains seem attractive, it is important to shift your focus from listing gains and concentrate on the fundamentals of the company. If the company is fundamentally strong and backed by quality management, the share price is bound to gain long-term returns even after the IPO.

  7. Look at the Valuation
  8. Valuation refers to the relative price at which an IPO is offered to the public and this is determined after valuing the company’s profits, revenues, cash inflows and debts.

The valuation of an IPO is a critically important indicator of the company's worth. Although it is hard to establish a valuation, investment bankers implement a highly proficient process to asses the company's management quality and earnings before deciding on the offer price for the IPO. To get a basic understanding, you could try to equate the valuation of an IPO with a registered counterpart in the secondary market. For a new business or a start-up IPO, consider techniques such as Return On Equity (ROE), Price To Book Ratio (PB ratio) and Price To Earnings ratio (PE ratio).

Investing in an IPO can be a lucrative opportunity, so find out what are the upcoming IPOs, and start investing now. It is worthwhile to consider the help of professionals at reliancesmartmoney.com to spot a good investment avenue and getting guidance on how to invest.

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