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5 Factors to Look at While Investing in an IPO

Introduction:

Of late, there has been a growing trend among investors to invest in almost every Initial Public Offering (IPO) that hits the market. Approximately 80 mainboard and SME IPOs have been launched in the first half of 2023, with several more waiting in the wings. Some of them have given more than 90% returns to investors, almost doubling their investments.

However, not every IPO is worth subscribing to. As an informed investor, you should assess an IPO on several counts before investing your hard-earned money. Or else, your excitement can soon turn into dismay. This article will discuss five essential factors you must check while subscribing to an IPO.

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Five factors to check before applying for an IPO

The following are the five factors you should consider before investing in an IPO:

The issuing company’s financials

Before investing in an IPO, know the issuing company’s financials as much as possible. Analyse how the company has performed in the last few years, how much profit it has made, how much revenue it has generated, and how much money it has borrowed. You should subscribe to an IPO only if the issuing company seems financially sound.

You will find information about a company’s financials in the Draft Red Herring Prospectus (DRHP). It is a document that a company needs to file with the Securities and Exchange Board of India (SEBI) to get approval for issuing an IPO. You can also visit the company’s website or track news portals and news channels to know the financials.

Promoters in the company

Another thing to look for before subscribing to an IPO is the issuing company’s promoters and management team. These are the people that run a company and takes crucial corporate decisions.

Companies with solid and experienced promoters usually have strong growth potential. The shares of such companies can appreciate considerably over time, and you can get excellent returns by investing in their IPOs.

Strengths and risks

Every company has its own strengths and risks. Conducting a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of a company before investing in its IPO is crucial. If the strengths outweigh the potential risks, you can place your bid.

For example, if a company enjoys a fair market share and has an efficient distribution network to cater to its customers, its IPO can provide good returns.

All issuing companies mention their strengths and risks in the DRHPs. You can also visit the Motilal Oswal website to know the strengths and weaknesses of a company whenever a new IPO is announced.

The valuation of the IPO

The valuation of an IPO depends on the price at which the shares are issued to the investors for the first time. It is one of the most crucial factors you should analyse before subscribing to an IPO. If a company’s IPO seems overvalued, avoiding investing in it is better. However, if an IPO looks fairly valued, you can bid for it to get high returns.

The best way to decide if an IPO is fairly valued is by comparing the issue price with the prices of shares belonging to similar companies.

Prevailing market conditions

Last but not least, you must look at the current market conditions before subscribing to an IPO. If the markets are bullish, the IPOs will likely open in green. However, even the best IPOs tend to open in red or offer comprised returns during the bearish market.

Prevailing market conditions carry even more significance if you invest in an IPO only for listing gains. However, suppose you are planning to hold the shares long-term. In that case, you should emphasise the issuing company’s fundamentals, IPO valuation, and other factors mentioned before.

To conclude

IPOs provide a good opportunity to acquire shares of promising companies at reasonable prices. Usually, it’s safe to invest in IPOs of companies with solid fundamentals. However, like any other investment, you must analyse a few factors and decide only after careful evaluation.

With Motilal Oswal, you can open a 2-in-1 Demat account and apply for IPOs seamlessly.

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