Investing in an IPO is a lucrative investment opportunity for many retail investors. Most of the IPOs in the last year have seen a good amount of listing gain which attracts a number of retail investors.
However, the sad truth is that not all IPOs perform well. In fact, many IPOs have shown underwhelming results. Hence, it's important to fully understand what you are investing in.
Here is a list of tips and strategies to help you make an informed decision when it comes to IPO investments.
Conduct Thorough Research
When a company launches an IPO, market analysts usually release research reports with their opinions. While these can be useful, they might also carry biases or subjective views.
If you are taking advice from financial influencers, make sure it's not a paid collaboration with the company as they will only show the positive side of the IPO.
Instead of relying solely on 3rd party sources, it's wise to do your own in-depth research. Compare the company with its competitors and review its overall performance to form a more accurate opinion.​​​​​​​
Understand the Business
The Red Herring Prospectus is a public document filed by every company with SEBI before launching an IPO. This document contains all the critical information such as the company’s history, business model, financial health, strengths, risks, and details about the IPO.
Going through the prospectus thoroughly is essential before making any investment. You must also understand how the company intends to use the funds raised through the IPO.
Ideally, the funds should be used for business expansion, asset acquisition, or research. Also, try to find if the business has a sustainable moat in terms of their suppliers, customers, or the product.
However, if the primary aim is to repay debts, you might want to reconsider investing in the IPO.
Choose IPOs with Reputable Brokers
Another factor to consider is the stockbroker managing the IPO. Reputable brokers are likely to underwrite IPOs they believe in. While a strong broker backing an IPO can be reassuring, it doesn’t guarantee that the stock will perform well. Always combine this with other factors when making your decision.
Evaluate promoters of the Company.
The people running the company—the promoters and management—play a key role in its success. In the case of an IPO, look into the promoters' actions. If they are selling off their shares entirely, it could be a red flag indicating financial trouble.
Assess the management team’s experience and the company’s employee retention, as these factors influence long-term performance.
Avoid these Mistakes at all Costs
Once you have made up your mind about investing in the IPO, make sure your UPI ID is connected to your bank account and that there are enough funds available to invest in the IPO. Don't apply for the same IPO using multiple broking apps with the same PAN number.
Finally, don’t forget to approve the mandate request in your UPI app to complete the IPO application process successfully.
To improve your chances of receiving an IPO allotment, it’s recommended to bid at the cut-off price. If the company offers multiple categories such as SHA, POL, IND, or EMP, you should consider applying separately in each category.
Be aware of the lock-in period.
One commonly overlooked aspect of IPOs is the lock-in period. According to SEBI regulations, promoters, institutional investors, and employees cannot sell their shares for six months following the IPO.
When this period ends, share prices often dip as these early investors sell off their stakes. Knowing the lock-in expiry can help you plan your trading strategy accordingly.
Stay cautious
IPOs can be volatile, so it’s important to approach them with caution. Always take recommendations—whether from a friend, financial advisor, or broker—with some scepticism. Ensure you’re making informed decisions based on solid research and strategy.
Final thoughts
In conclusion, a company that has a chance at winning needs a good founder and a good team. The key to investing in IPOs today is being able to sort through the noise and find the rare opportunity.
While this can be challenging, it doesn’t mean you should avoid IPOs altogether. Many investors who purchase shares at the initial offering price have seen great returns.
When chosen wisely, IPO investments can be highly profitable, and keeping an eye on the company’s IPO schedule can give you an edge.
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