Are you looking to invest in new businesses? Do you want to build wealth over the long run? You may consider investing in an initial public offering or IPO. It is the process where a private company issues its shares to the public for the first time. Several companies are lining up their IPOs this year, and many people struggle to pick the right initial public offering. How to choose the right IPO?
What is an IPO?
You have privately-owned companies issuing their shares to the public for the first time through an initial public offering or IPO. You will find different IPO investors such as retail investors, non-institutional investors (NII), anchor investors and Qualified Institutional Buyers (QIB).
Retail investors have a minimum allocation of 35% of the total shares issued through an IPO. QIBs have a maximum allocation of 50%, and a minimum of 15% of the bid is reserved for non-institutional investors. Moreover, retail investors can invest a maximum of Rs 2 lakh in the IPO.
How to pick the right IPO?
You must invest in IPOs only if you are an aggressive investor willing to invest in stocks. Moreover, several retail investors invest in IPOs only for listing gains. These are the profits you get after shares are listed on the stock exchange, such as NSE and BSE. However, you may invest in IPOs if you see potential from these companies over time.
You may consider reading the Draft Red Herring Prospectus or DRHP before investing in an IPO. It is also called the offer document and tells you how the company intends to use the money raised through the IPO. Moreover, you also get detailed information on the company’s financials, business operations, and the firm’s promoters.
You must invest in the IPO of a company only if you understand its business model. It helps you gauge the company’s market potential and whether it will make profits in the long run.
It helps to invest in an IPO after studying the track record of the promoters and the management. After all, the top management plays a vital role in the operations of the business. You must also check the work culture at the firm.
You must evaluate the financial health of the firm based on its revenue and profit. It helps as some new-age companies launch their IPOs even if they are at losses. Moreover, you must check if the valuations are too high, or you may overpay for the company’s shares.
You could invest in the IPO of a firm after comparing its performance with other companies. You can get information on the financials and valuation of the peers of the company from the DRHP.
Do check the risk factors and challenges before investing in the IPO of a business. For example, litigations and contingent liabilities can impact the profits of a business and its prospects.
You must invest in an IPO only if you are satisfied with how the company is utilising its IPO proceeds. For instance, many firms use funds raised through the IPO to repay their debts. It helps if you invest in IPOs where the company uses the IPO proceeds to expand the business. In a nutshell, you must invest in an IPO of a company based on its long term potential rather than listing gains.
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