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Initial Public offers (IPOs) offer one of the best rewarding investment opportunities to investors. Good profits can be earned in the very short term (6 to 10 days) by investing in IPOs. But not every IPO issued by different companies is a good choice for investment and there are some critical things you must see before making a selection of IPO for your investment.
Any private organization needs money to meet its costs or for its expansions and the organization can arrange this fund in many ways. One way to raise money is from the general public by offering them to be the shareholders of the company. This process of inviting the public to invest in their organization and raise funds for the company is called IPO (initial public offering). This means it is the procedure of selling its equity or shares to the public in the primary stock market.
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Things to consider for the selection of IPO
Know the company
It is the first and thumb rule of making an investment with anybody that you must have thorough knowledge about the firm or entity in which you are investing. Knowing about the company prior is a must as your hard-earned money will be used by the company.
So, you must check the fundamentals of the company like the sector of operations, its competitors, its participation in the sector, revenue generation, profit and loss, legal cases against if any, and many more. It will dictate to you the strength and risks associated with the company. Based on these factors, you can make a wise decision whether to invest with the company or not and accordingly, you can complete your selection of IPO.
Promoters of the company
You must check the promoters and their details like qualifications, positions in the management and experience. Above all, the promoter must have a larger proportion of shares with them, as it instills a sense of responsibility in the promoters of the company. A company having smaller shares of promoters is not taken as a good sign for the future of the company as it shows a deficit of confidence in their own company.
Does the company have strong Brokers with it?
As you must be aware that whenever any company decides to go public and offers its IPO, the company has to hire brokerage firms and appoint lead managers to complete this process. If a company is hiring big investment bankers as brokerage firms, that reflects a lot about the company’s decision-making capabilities.
So, a company with a strong underwriter is a good sign for the investors to bid upon. It is not always right that having a strong firm as a broker is a sign of good returns for investors, but there is a large possibility that the company will surely provide good returns due to its association with quality bankers. Having strong brokers will provide you with an easy solution for the selection of an IPO.
Have you gone through DRHP/RHP?
Draft Red Herring Prospectus is prepared by the underwriter to be presented to the Security Exchange Board of India well within time to complete the registration for IPO. DRHP/RHP includes some important details for investors and every investor must go through this detail before the selection of an IPO for investment.
Some of the Details that RHP includes are Details about the company, its competitors, management, legal proceedings if any, and many more. DRHP is prepared by the company so it is easy to be modified by the company, but that should not let you skip reading it.
Because through this, you will come to know many details like the usage of the fund raised by IPO and how it can affect your investments. So, companies planning to utilize the funds for expansion and growth are the best investment option while some companies may use the fund to repay their debts which are taken as negative for investors in general.
Wait for the last Day of the Subscription:
Usually, an IPO remains open for subscription for 3 to 4 days and after that, you cannot bid for that. You must wait till the last day of the subscription as the ratio of subscription will help you in making a decision for bidding. You should watch the subscription rate of RII investors for an IPO, but more than that you should look at the rate at which IPO was subscribed by the QIB investors.
QIB investors are financially managed by big firms like mutual fund houses and if they are bidding high for any IPO that means the company has the potential to grow in the future and it can be a good sign for making a selection for IPO.
Look for the Size of the Issue:
The size of the IPO issue must be large, as the larger the issue more the money promoters will have and they will be able to earn more. The large issue also reflects the capabilities of the promoters and the growth prospects of the company. So company having a large issue may be having a large expansion and so is in the need of large money, but must correlate it with the money going to be used by the company in DRHP.
Go for Investment and not for Trading
You should make a selection of IPO for an investment avenue and not just as a tool to take listing gain on the very first day of listing at the exchange. Because a good company generates wealth over the long term. Short-term trading can be lucrative, but it is not considered a wealthy decision till the time you have not invested a heavy amount in IPO. So, as a retail individual Investor (RII), your primary aim must be to accumulate wealth and not short-term gain.
Blogs that may enrich you more:
- What is Initial Public Offering (IPO)?
- What is Draft Red Herring Prospectus (DRHP)?
Bottom Lines:
Every IPO is not always a good opportunity for investment, hence every investor must see some important things before selecting the IPO. Important points discussed in this article must be well-researched by you if you want to select an IPO for investment purposes.
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