The Buyt Desk
The year 2021 will be remembered for many things and one of them is the record number of IPOs. Around 63 IPOs hit Dalal Street raising a whopping Rs 1.18 Lakh Crore. This kind of rush was last seen in 2017 when 36 IPOs were announced and they managed to raise around Rs 67,147 Crore. But 2021 broke all the previous records from new-age startups to fintech, from insurance aggregator to makeup aggregator everyone wanted a bigger pie and IPO was the sought after path. But what is an IPO and how should you invest in them? The term IPO stands for initial public offerings. When a company for the first time introduces its shares to the equity market and asks people to buy their share it’s called an IPO. A privately-owned company thus becomes public. The IPO is the vehicle or the medium that onboards new investors through the equity market. The company may have angel investors, founders of the company and venture capitalists as its shareholders. But when it comes to the public, investors having shares of the company become its shareholders.
Why invest in an IPO?
IPO has been a centre of attraction because it has the potential of earning quick gains. When a new company forays into the primary market the price that they offer for a share/unit is reasonable. After the IPO step, comes the listing and the share enters the secondary market. Most of the companies, especially those who are talked about businesses or brands, show an upward move on the first day and an investor makes money. This is called listing gains and many investors tend to book this profit and sell their share and some may hold it for a long time.
However, as said, everything that shines is not gold so is with the IPOs. Unlisted companies take the route of IPOs to come into the market. Therefore, only limited information remains available about their businesses. That makes an IPO a risky product, unlike investing in listed companies.
What Should You Look for in an IPO?
Here are a few points a retail investor must keep in mind before investing in an IPO –
Cross Verify – Companies listed in the stock exchange are bound to share information of their financial status following the compliance but it is not with the IPO. Hence, the role of investors in digging out information about the company launching the IPO becomes more significant. It is crucial that they put every bit of effort to check the financial status of the company they are about to invest in, its promoter and past records before heading to investment.
Go With Fundamentals – To know about the company that launched IPO, follow the fundamentals. Compare the company performance with the other companies operating in the same segment. Check short to the long term growth potential of the company. Comparing the company performance with its competitors will give a fair idea of its IPO stock price.
Read Company’s Prospectus – The company launching IPO brings its performance details to the public via a prospectus. The prospectus is called a draft red herring prospectus (DRHP). The document presents details on the financial standing of the company, its competitors, promoters and performance. DRHP indeed gives an insight into the company’s performance, it is also a fact that the company itself prepares it. Thus, cross-checking and verifying every piece of information is a must for retail investors.
Check The Interest Of Institutional Investors – Retail buyers need to cross-check how interested investment investors appear in the IPO. It gives a clue about the risk involved in the IPO. The higher institutional buyer interest suggests the market is confident for the IPO. However, investors must check every factor before investing.
Investment Goal – The aim is you must keep your investment goal clear. It will help you analyze whether the IPO launch will help you in accomplishing your investment goal or not. Based on your investment goal, try to cross-check the company performance launching the IPO.
Keeping these points in mind, retail investors can count on the risk factors. The retail investors are small investors with a maximum bidding limit for shares Rs 2 Lakhs often trades in smaller amounts compared to institutional investors. Further, they also have to pay higher transaction charges.
