5 things to watch out for before buying an IPO

The ideal IPO should be chosen based on various descriptive factors about which one should possess prior knowledge before beginning the investment process! Let us learn about these factors and aspects in detail.

MintGenie Team
Published26 Jun 2022, 11:19 AM IST
IPO is a process through which a private company goes public by putting up its stocks for sale in the market.
IPO is a process through which a private company goes public by putting up its stocks for sale in the market.(Photo by Scott Webb on Unsplash )

The stock markets have various options of investment. Some of the few examples are equity shares, mutual funds, debentures etc,. The main question stands in action: which one to invest in?

All these shares and debentures have their own risk factors and gains which are constant to their nature. The final decision factor which comes into play is the investor’s risk appetite and amount of investment he/she is ready to make.

Initial Public Offering has been a popular choice of investment in the stock market, following are the pointers which an investor should keep in mind before investing in an IPO.

Profile and Objective

Whenever a big company goes public, there is usually a lot of hype in the market which sometimes leads the investors to invest in them without a proper research and understanding.

It is important for investors to know it’s clear objective before buying an IPO of any company. A lot of times people get influence in buying IPOs because of peer recommendation, or simply because the company is a recognized one. But the reasons should definitely go deeper than this.

Potential in the market

IPOs allow companies to raise a good amount of funds which can be used by the companies for further expansion, growth, mergers etc. It is important to look out for such information regarding the company before investing in it.

Analysing the true potential of the company among its competitors and market will give a better understanding and a good informed decision will lead to higher returns in the future.

Utilisation

Utilisation of the proceeds gained by going public tells a lot about the company. The investors before making their investing decision should read about how the company is going to utilise the proceeds.

If the company is only going to pay its debts then investing in such a company would not be fruitful, but if the company says that it will expand, will conduct mergers then the investment is attractive and worthy.

Valuation

The process of valuation can be a little challenging for retail investors but have been considered as a beneficial step in making the investment decision. To evaluate one company’s shares with another, the analysing tools which can be used are Price-to-Earnings ratio or Price-to-book ratio etc.

The investor can also compare the performance of the IPOs of the companies present in the market to gather a better understanding.

Understand the backing

Investors a lot of times make their decisions after looking at the strong nroekerages and big underwriters. However, these factors do not guarantee good returns on your investment.

Factors like past performance, future goals, management stability and growth prospects should be the main reasons for investors to show interest in buying IPOs from the company.

To conclude, the decision should be based on the investor’s risk appetite, personal objective and whether the investor believes in the company’s goals. The decision should not focus on the hype in the market, peer recommendation or simply for the fear of missing out on an opportunity.

Scepticism always plays an important role while investing and should be followed by all investors along with a thorough understanding of the market and research about the company.

IPOs are the first issues of the stakes of a company whereas FPOs are generally the additional issues.
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First Published:26 Jun 2022, 11:19 AM IST
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