5 Tips for Investing In IPOs - Motilal Oswal
5 Tips for Investing In IPOs - Motilal Oswal

5 Tips for Investing In IPOs

There are many of us who dream about earning money by investing in stocks. While there are some who invest in Mutual funds or trading, there are others who prefer investing in an IPO or Initial Public Offering. Gaining profits from IPOs is not as easy as it sounds but with a planned strategy and some helpful tips, one can invest money in IPOs and also be assured that they have some killer returns. There are a number of well known companies that have experienced amazing gains the very first day of their IPO but they sure did disappoint their investors in the long run.

One always has to remember that no investment comes without risk. With the IPOs now day’s investors cannot expect double or triple returns by just flipping stocks, but one can still make good money by shifting their focus from making quick money to long-term gains. Rather than focusing on those that have an initial bounce, it is always beneficial to look for those with long term prospects.

IPOs come with unique risks and this makes them different from those average stocks that have been into trading already. If you have decided to invest and take a chance with IPOs, we have the 5 tips for investing in IPOs that one should look at before investing.
 

Tip 1: Check for the performance of the company
Before you make an investment in a company’s IPO, do check for the performance of the company year after year. One also has to have a look at any sudden increase in
company’s revenues before the launch of IPO. If the company’s revenue is growing with a 20% growth annually, this indicates that the firm is growing well. If the performance of the company is lower than that of the industry, then the company might be an underperformer. In such cases, one can look for other better companies to invest in.

Tip 2: Pick a company that has strong brokers
Investors need to understand that strong brokers always help bring quality companies into public. One has to be more cautious when choosing companies that have smaller brokerages. However, one advantage investors can have with small brokers is that they come with a smaller client base and this makes it easy for an individual investor to invest in the pre-IPO shares. But as said, it is important to do your own research about the firm before investing.

Tip 3: Check for the background of the promoters
This happens to be one of the most important points that have to be checked before making an investment in an IPO. Do check about the background of the promoters of the company and the experience they have. One also needs to check if the company has any defaults of payments from any banks as the performance of the promoters would for sure impact such a default in payments.

Tip 4: Carefully read the prospectus of the company’s IPO
Investors should never skip checking the prospectors. Read through it well but never put all your faith in the prospectus. Though it might be a very dry read, this will give you an insight about the risks and the opportunities the firm has to offer. This would also list information about how the money raised by the IPOs would be used. For example, it really is not a good sign if the company would use the funds for repaying their loans or for buying equity from private investors and so on. One has to choose those companies that would use the funds for research or market expansion.

Tip 5: Always wait for the lock-in period
The lock-in period can be anything from 3 months to 2 years and the stock brokers or the underwriters will not be able to sell their shares during this lock-in period. If the brokers or the underwriters are still holding on to their share of stocks even after the lock-in period, it shows that the company is going strong and they certainly wish to grow their investments.

The above mentioned are the important 5 tips for investing in IPOs. Do remember that when it comes to investing in IPOs, an informed investor reaps the benefits better than the one who is not.
 

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